Regulatory backdrop
The updated guidance on non-financial misconduct is timely given the recent controversy surrounding the ‘Fit and Proper’ test in light of sexual assault and harassment allegations against hedge fund manager Crispin Odey. A Financial Times report published in July found that Mr Odey had been accused of misconduct by 13 women over the course of 25 years but was still considered to meet the ‘Fit and Proper’ standard required of senior management at financial services firms.
The FCA’s policy on enforcement action taken against individuals who have engaged in non-financial misconduct has long been an area of ambiguity. In 2021, the Upper Tribunal upheld a decision by the FCA to ban director and financial advisor Jon Frensham following his conviction for a sexual grooming offence. It was the first time that the Upper Tribunal had been asked to consider a case where the FCA was seeking a prohibition order against an individual based on that individual’s conviction for a criminal offence that was unrelated to the individual’s regulated activity and did not involve dishonesty.
In making its decision, the Upper Tribunal remarked that Mr Frensham’s conviction alone would not, in its view, have justified the prohibition order: It was necessary to consider whether Frensham’s non-professional misconduct also amounted to professional misconduct in order for regulatory action to be justified. Frensham’s behaviour in breaching the conditions of his bail and failing to be open and transparent with the FCA meant that this test was satisfied.
In 2022, the FCA appeared to go against the approach taken by the Tribunal in Frensham when it banned Ashkan Zahedian, the sole director of an authorised consumer credit firm, from working in financial services after a criminal conviction for a violent non-work-related offence.
As a result, it is clear that the new proposals will provide some much-needed clarity regarding the approach of the FCA to enforcement action taken against individuals who have engaged in non-financial misconduct, as well as some guidance on their expectations of firms when it comes to notifying the regulators of such incidents.
The proposals in detail
In its recent consultation paper, the FCA proposes to make changes to explicitly incorporate non-financial misconduct within: (i) Fit and Proper assessments; (ii) the Conduct Rules; and (iii) the Suitability Threshold Condition.
The FCA also proposes to introduce guidance on how non-financial misconduct should be incorporated into regulatory references. The FCA Handbook will be amended to reflect the FCA’s view that non-financial misconduct, such as harassment, bullying and sexual assault, is misconduct and not an additional principle. The new framework should provide the clarity and reassurance needed by firms to take decisive action against employees who engage in non-financial misconduct.
Fit and Proper assessments
The FCA is set to provide more comprehensive guidance on how non-financial misconduct sits within the Fit and Proper Test for Employees and Senior Personnel (FIT) section of the FCA Handbook. The guidance aims to clarify and expand the criteria for assessing the fitness and propriety of individuals performing senior management functions (SMFs) or certification functions.
It will be emphasised that workplace misconduct, such as bullying and harassment, as well as serious personal misconduct, such as sexually or racially motivated offences, are relevant when assessing fitness and propriety. Firms will need to take these additional factors into consideration and ensure they are satisfied, on an ongoing basis, that individuals performing an SMF are fit and proper to do so.
In the FCA’s view, there is a risk to public confidence when individuals who have committed serious non-financial misconduct are permitted to continue working in the sector. In such instances, the FCA will impose a partial or full prohibition on that individual depending on the level of risk posed.
The Conduct Rules
The scope of the Conduct Rules (COCON) is poised to expand, encompassing serious instances of bullying, harassment and similar behaviours directed towards fellow employees, employees of group companies and contractors. New guidance will define the types of behaviour that fall within COCON’s expanded scope and clarify which conduct related to an employee’s personal life falls outside its scope. COCON is usually limited to conduct related to a firm’s financial activities, except in the case of banks.
The FCA will take disciplinary action for serious breaches of COCON and will consider factors such as the nature of the conduct and its impact on the victim. Serious breaches will lead to sanctions, such as financial penalties, and in some cases will lead to the individual in question no longer being deemed fit and proper.
Importantly, firms are required to notify the FCA if they take disciplinary action for non-financial misconduct that breaches the COCON rules.
Guidance on the Suitability Threshold Condition
The FCA is planning to extend its guidance on the Suitability Threshold Condition in COND, which assesses the fitness and propriety of the firm and its senior management. The guidance will include offences relating to demographic characteristics, such as sexual or racially motivated offences, and findings of discriminatory practices by the firm or connected individuals as factors to be considered when assessing suitability.
In making its assessment against COND, the FCA says it will aim to apply the aggregated picture across the firm, assessing on a case-by-case basis the actions taken by the firm as a whole.
This opens up the possibility that the FCA could act on its own initiative to vary or cancel the firm’s permissions, or impose supervisory requirements on it, as a result of non-financial misconduct considerations. This would be a significant change and, if brought forward, could herald a dramatic shift in the regulator’s treatment of non-financial misconduct in the future.
Implications for firms and individuals
Firms will be required to familiarise themselves with the changes and should ensure they are:
- Reviewing and amending policies and procedures to ensure compliance with the new guidance, for example by using FIT guidance to update their criteria for assessing whether individuals performing a SMF are fit and proper to do so.
- Implementing new diversity and inclusion (D&I) strategies to ensure compliance with the suitability requirements in COND.
- Providing thorough compliance training for employees at every level of the organisation.
- Offering effective mechanisms by which employees can report misconduct concerns.
- Investigating concerns relating to misconduct promptly and effectively and reporting to the FCA where appropriate.
The FCA has clarified that while the proposals amend FIT, COCON and COND, they do not expand their scope: If a firm does not currently fall within the scope of these rules and guidance, the proposed changes will not be applicable to them.
Individuals should be aware of potential civil, criminal and/or disciplinary action that might be taken against them as a result of non-financial misconduct, whether in or outside of the workplace. This may include prohibition from working in regulated firms.
Areas of potential ambiguity remain
We will need to wait for the detail of the proposals before deciding whether they bring the clarity needed to this difficult area. The courts, in cases involving action taken by the Solicitors Regulation Authority (SRA) against solicitors (including Wingate v. SRA [2018] 1 WLR 3696 and Ryan Beckwith v. SRA [2020] EWHC 3231 (Admin)), have made clear that a failure to act with integrity in one’s personal life which is not relevant to professional conduct should not lead to regulatory action. These authorities were cited approvingly by the Upper Tribunal in Frensham.
Whether the FCA’s proposals to expand the types of personal conduct that could lead to regulatory action so as to include bullying and harassment (whether it takes place within the workplace or outside of it, provided that it is sufficiently serious) are consistent with this approach remains to be seen. If not, confusion is likely to remain as to where the line is drawn in terms of behaviour that should be regarded as beyond the pale.
Client Alert 2023-225
