"Particularly significant is the FCA’s emphasis that misconduct outside work may be relevant to fitness and propriety, even if that behaviour is unrelated to the individual’s role."
A Treasury Committee into “Sexism in the City” has been examining the barriers faced by women in financial services and part of this explored the measures that both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) can take to reduce sexual harassment and misogyny. The FCA has proposed to raise standards in the sector by defining the scope of non-financial misconduct – so what are the implications for firms going forward?
The role of non-financial misconduct
'Non-financial misconduct' encompasses a vast range of behaviours such as, bullying, sexual harassment, and discrimination. Since 2018, the FCA has taken the stance that “non-financial misconduct is misconduct”. In practice, however, things have not been quite as simple as there is limited explanation in the FCA’s rules as to what constitutes non-financial misconduct leaving firms to make difficult judgment calls when certifying an individual as being fit and proper.
This has been a matter of concern for firms (especially those without established HR teams) when trying to apply an approach that is consistent across the industry, particularly in respect of the interplay between an employee’s personal and professional lives. Similarly, this gives significant uncertainty for executives on the regulatory implications of facing allegations of misconduct, especially bullying or discrimination complaints.
Following consultations in 2023, the PRA and FCA are expected to publish Policy Statements in 2024 establishing a new regulatory framework on diversity and inclusion. This aims to increase the participation of underrepresented groups in the sector by making it more difficult for ‘bad apples’ to work in the industry. The new rules come into force 12 months from publication of the Policy Statements and clarify that an individual’s conduct outside work will be relevant. Specifically:
• FIT (the part of the FCA’s handbook dealing with the fit and proper test) will be amended so that incidences of bullying, sexual harassment, and discrimination, will be relevant to fitness and propriety and ought to be disclosed in regulatory references;
• COCON (the FCA Code of Conduct) will be expanded to cover “serious” instances of non-financial misconduct; and
• The guidance on the Suitability Threshold Conditions in COND (another section of the FCA’s handbook) will be amended to include sexual or discriminatory offences and similar.
The FCA also confirmed that it is launching a survey of banks and insurers, examining cases of non-financial misconduct and the methods of detection and resolution. This is an area where the industry has been asking the FCA to be much clearer about how firms should act on non-financial misconduct.
The aim of the review, which is expected to complete by the summer, is two-fold, to take stock and share best practice; and inform the FCA’s supervisory programme when the new rules come into place.
The FCA wants better visibility of instances of non-financial misconduct so that where there are high levels of reporting (or, unexpectedly low levels of reporting), the FCA can investigate the reasons why.
The approach for firms in the months ahead
The proposal to include reference to and guidance on non-financial misconduct explicitly in FIT, COCON and COND, along with the supervisory work, sends a clear message that the FCA considers such behaviour to be firmly within its remit. Particularly significant is the FCA’s emphasis that misconduct outside work may be relevant to fitness and propriety, even if that behaviour is unrelated to the individual’s role. This increases the scope for regulators and employers to look into the private lives of individuals and for behaviour outside work to impact an individual’s career in financial services.
The FCA intends to provide further guidance, which will hopefully address any questions which might remain, such as where to draw the line when determining if behaviour is “serious”. However, the FCA has made clear that “absolutely detailed guidance and rules” regarding non-financial misconduct is simply not possible, as it is ultimately a judgement call for a firm.
Whilst we wait for the new rules and guidance to be implemented, we advise firms to ensure they have appropriate processes in place to investigate non-financial misconduct robustly and to evaluate how it might impact an individual’s fitness and propriety in practice. The new rules on non-financial misconduct will apply to all firms, regardless of size. As such, firms, including smaller firms who may not historically have offered employees formal training on non-financial misconduct, should emphasise that misconduct both within and outside of work can have an impact on the outcome of a fitness and propriety assessment.