NFM is the new SM&CR, only harder

In summary:

• The new non-financial misconduct (NFM) regime is a radically different regulatory initiative, concerned not with systems, rules and reporting, but behaviours, leadership and culture
• Successful implementation will require unprecedented cooperation between risk, compliance, legal and HR functions
• Firms must also navigate the interaction between employment law and the new regulatory obligations
• Those that leave it until the last minute before implementation in September 2026 may not be adequately prepared and will forgo a potential competitive advantage 

The Financial Conduct Authority's new non-financial misconduct (NFM) regime has brought into focus some interesting tensions between regulatory expectation and employment law and employee relations obligations. But while many firms continue to view NFM as a future compliance requirement, the most successful are recognising that it is not merely a regulatory change programme. Rather, it is a catalyst for improving culture, strengthening governance and enhancing organisational resilience.

The new regime will also require closer collaboration and alignment than ever before in the treatment of senior managers, material risk takers, certification staff and conduct rules employees. Firms that return from the summer prepared to address these challenges will be far better positioned than those that delay.  

While there is a temptation to treat NFM as a project that can wait until closer to the implementation date of 1 September 2026, this approach carries considerable risk. 

NFM is fundamentally different from many regulatory initiatives because it is not principally about systems, regulatory reporting or technical rule interpretation. It is about behaviours, leadership, culture and judgement. These are areas that cannot be transformed overnight. 

In many respects, this challenge is greater than the implementation of the Senior Managers and Certification Regime (SM&CR). It requires firms to reconsider behaviours and cultural norms that may previously have been tolerated or overlooked. Following implementation, firms could see increases in grievances, whistleblowing reports and conduct concerns if the organisation has not been adequately prepared for the clearer standards and expectations that will exist under the new regime.  

Conduct that previously sat within a grey area may now be viewed very differently. 

The FCA has made it clear that behaviours such as bullying, harassment, discrimination and violence will increasingly be viewed through a regulatory lens and not simply as matters for human resources. Serious misconduct may impact an individual's fitness and propriety, trigger conduct rules breaches and require disclosure through regulatory references. This represents a significant shift in regulatory expectations. 

However, NFM itself may be the easier part of the challenge. The changes to fitness and propriety assessments arguably require even greater attention. 

Firms will increasingly need to determine how substantiated NFM incidents influence assessments of individuals performing regulated roles. This becomes particularly challenging where conduct occurs outside the workplace or via social media channels. Clear decision-making frameworks and assessment criteria are essential to ensure consistency, fairness and proportionality. Without them, firms risk creating significant legal, employee relations and regulatory challenges. 

Firms face further complexity when considering circumstances that may not, on the face of it, constitute NFM. Power dynamics may need to be considered where there is an imbalance of authority or influence. The intention behind an individual's conduct, alongside the vulnerability of the affected individual, may also become a relevant factor when assessing ongoing fitness and propriety. Determining what is fair, proportionate and consistent will often be far from straightforward. 

Importantly, the challenge extends well beyond understanding the rules themselves. The real challenge lies in operationalising them effectively. 

Firms must establish clear definitions, governance arrangements, escalation processes and assessment frameworks. Boards and senior management teams must determine what constitutes serious misconduct, how incidents should be investigated and what actions should follow. Delaying these discussions only compresses implementation timelines and increases the risk that the full implications for the organisation are not properly considered. 

One of the most common pitfalls is treating NFM purely as an HR matter. While HR functions will undoubtedly play a central role, NFM cuts across a much broader range of disciplines. 

The successful implementation of NFM will require unprecedented cooperation between risk, compliance, legal and HR functions. These disciplines are now highly interconnected and must come together to evaluate, design and implement a framework that is both fair and proportionate for the organisation. 

Internal audit, whistleblowing teams, senior managers and business leaders also have important responsibilities in ensuring that NFM is embedded effectively and that unintended consequences are avoided. Organisations that fail to establish a coordinated approach may find themselves operating with inconsistent standards, fragmented decision-making and conflicting outcomes. 

Another significant challenge arises from the intersection of employment law and regulatory obligations. 

In many cases, firms will be navigating parallel but distinct processes. Actions that may be appropriate from an employment law perspective may not necessarily satisfy regulatory expectations, and vice versa. 

Equally, behaviours that fall outside the FCA's definition of NFM may still present significant employee relations issues. Conduct occurring while commuting, during social events or outside the workplace may not constitute NFM but could still result in disciplinary action, performance management processes or other employment-related consequences. 

Firms that leave consideration of these issues until the last minute may find themselves facing difficult disputes, inconsistent outcomes and heightened regulatory scrutiny. 

Similarly, there is a danger that organisations focus solely on responding to incidents rather than understanding the underlying cultural drivers. 

The FCA's interest extends beyond individual cases and into the broader culture that enables or tolerates misconduct. A series of isolated incidents can quickly become evidence of wider governance, leadership or cultural weaknesses. 

Consequently, firms should be asking broader questions: 

• Do employees feel safe to speak up? 
• Are behavioural expectations clearly communicated? 
• Do performance management and reward frameworks reinforce the right behaviours? 
• Are leaders visibly demonstrating the standards expected of others? 

The new requirements on senior managers to take reasonable steps in relation to NFM will need to be reflected in governance arrangements and, where appropriate, incorporated into statements of responsibility. It has never been more important for leaders to ask themselves: "Am I setting the appropriate tone from the top?" 

Regulators will expect senior managers not only to react to misconduct but also to demonstrate proactive oversight of culture and conduct risks. Boards should therefore begin reviewing the management information they receive, the culture indicators they monitor and the mechanisms they use to identify emerging concerns. Waiting until implementation approaches may leave insufficient time to demonstrate meaningful progress. 

This is why early preparation is so valuable. Organisations that approach NFM in a structured and timely manner have an opportunity to undertake thoughtful reviews of culture, governance and controls before regulatory pressure reaches its peak. They can identify weaknesses, challenge assumptions and implement improvements in a measured and controlled way. 

They can also ensure that NFM becomes embedded within existing frameworks rather than bolted on as a standalone compliance exercise. 

Firms should not overlook the implicit connection between NFM, governance failings and the FCA's threshold conditions. A failure to implement and monitor NFM effectively could ultimately raise wider questions regarding suitability and regulatory compliance. 

Perhaps one of the most significant, yet frequently overlooked, implications of NFM is its connection to psychological safety and speak-up culture. 

Historically, many firms have focused on misconduct once it has been reported or identified. However, regulators are increasingly interested in whether employees feel able to raise concerns in the first place. Previous regulatory surveys have shown low levels of reporting in this area. An organisation that experiences few reports of bullying, harassment or discrimination should not automatically assume that it has a healthy culture. In some cases, the absence of reports may indicate that employees lack confidence in reporting mechanisms, fear retaliation or believe that concerns will not be taken seriously. 

Psychological safety exists where individuals feel able to challenge decisions, raise concerns, admit mistakes and express differing viewpoints without fear of negative consequences. These environments are generally characterised by stronger governance, better decision-making and greater organisational resilience. By contrast, cultures that discourage challenge or tolerate unacceptable behaviours frequently allow issues to remain hidden until they become significant regulatory, legal or reputational problems. 

This has particular relevance in regulated firms, where employees are often the first line of defence in identifying conduct risks, control weaknesses and emerging concerns. Individuals who are reluctant to speak up about inappropriate behaviour may be equally reluctant to challenge poor decisions, question excessive risk-taking or report breaches of regulatory requirements. 

Consequently, firms should not view speak-up arrangements solely through the lens of whistleblowing. The broader question is whether employees at all levels feel empowered to challenge inappropriate conduct and whether leaders respond constructively when concerns are raised. Senior managers should be asking themselves whether their behaviours actively encourage challenge, openness and transparency, or whether they inadvertently create barriers that discourage employees from speaking up. 

The FCA is likely to place increasing emphasis on these cultural indicators when assessing whether firms have implemented NFM effectively. A firm that can demonstrate strong reporting channels, high levels of employee trust, effective challenge and positive speak-up behaviours is likely to be in a materially stronger position than one that relies solely on policies and procedures. Ultimately, the most effective defence against misconduct is often not a disciplinary process, but a culture in which employees are confident enough to raise concerns before problems escalate. 

There is also an often-overlooked commercial dimension to NFM. Firms with strong cultures typically experience higher employee engagement, improved retention, stronger client relationships and fewer operational disruptions. Conversely, unresolved conduct issues and inconsistent behavioural standards can damage reputation, increase staff turnover and consume significant management time. 

Viewed through this broader lens, NFM preparation should not be seen merely as a compliance cost but as an investment in organisational effectiveness and long-term business performance. Who would not want to work in an environment where behavioural standards are strong, clear, consistently applied and actively supported by leadership? 

Perhaps most importantly, early adopters have the opportunity to shape their own approach before external pressures dictate the agenda. By conducting training, reviewing policies, clarifying responsibilities and engaging leadership teams now, firms can build a framework that aligns with their culture and values. 

Those that delay may find themselves making rushed decisions under regulatory pressure or in response to an incident that exposes weaknesses in their arrangements. 

The firms that will navigate the new NFM landscape most successfully are unlikely to be those with the largest compliance teams or the most sophisticated policies. Rather, they will be the organisations that recognise NFM for what it really is: a culture initiative supported by regulation. 

They will understand that compliance alone is insufficient and that sustainable success depends upon leadership, accountability, communication, trust and the creation of an environment in which employees feel safe to speak up and challenge behaviours that fall short of expected standards. 

The message from regulators is increasingly clear. Non-financial misconduct is no longer a peripheral issue. It is becoming a core component of how firms assess conduct, culture, fitness and propriety. 

Organisations that embrace this change early will place themselves in a far stronger position than those that wait for the implementation deadline to force action. In the context of NFM, the greatest risk may not be getting it wrong – it may be waiting too long to begin, and ultimately becoming an example of how not to approach change in regulated markets.