Brodies examines the FCA’s proposed rules and guidance in relation to non financial misconduct and the key HR issues for financial services firms to consider in light of those proposals.
The #metoo movement led to a shift in society’s expectations on how misconduct should be treated, in the workplace or otherwise. In the financial services sector, the FCA has made it clear that non-financial misconduct (NFM) falls within the scope of its regulatory remit.
Until now, there has been limited guidance for financial services firms on what NFM means in practice, however the FCA proposes to change that by publishing a consultation paper and new rules, which amend the FCA handbook to expressly include NFM considerations as part of regulatory standards that individuals and firms must follow.
Given the interface between a firm’s regulatory obligations and employment law, the proposed rules raise important HR issues that firms should consider prior to them coming into force (an expected further 12 months after publication of the final rules this year).
Proposed changes to the FCA handbook
The following proposed rules may be implemented in full, or amended in line with consultation responses:
- Amendment of the conduct rules (which apply to most staff within a financial services firm (except ancillary staff) to:
- Include examples of NFM such as bullying, discrimination and harassment, which may amount to a breach of conduct rule 1 – acting with integrity.
- Clarify that the rules do not apply to the personal or private life of an individual. In doing so the guidance sets out illustrative examples, with one example providing that: misconduct against a fellow employee at a social occasion in a personal capacity does not generally fall within scope, while misconduct at a social occasion held on behalf of the firm does fall within scope.
- State that the rules only apply to NFM that is ‘serious’.
- Provide a defence to an individual where, in relation to their conduct, they (a) had good and proper reason for it, provided that this belief was reasonable; (b) did not intend that it would have a negative impact; (c) did not know that it was having that effect; (d) were not reckless about its effect.
- Provide non-exhaustive examples where managers may be in breach of conduct rule 2 – acting with due care, skill and diligence, such as: failing to protect staff against NFM, or failing to take seriously or to deal effectively with complaints of NFM.
- Amendment of the fitness and propriety section of the FCA handbook (which applies to individuals performing a senior management or certification function) to confirm that NFM – eg bullying, discrimination and harassment – within work is relevant to fitness and propriety. In addition, and in contrast to the conduct rules, it also provides that NFM in a person’s personal/private life may be relevant to a fitness and propriety assessment where behaviour is disgraceful or morally reprehensible or otherwise sufficiently serious, even where there is little risk of that behaviour being repeated in work, or it does not otherwise involve a breach of regulatory standards.
- Amendment to the guidance on the suitability threshold conditions (the minimum standards a regulated firm must satisfy to remain fit and proper) to include in its assessment whether there have been any sexual or racially motivated offences or discriminatory practices within a firm.
HR challenges to consider
Procedures and training
It is unlikely that firms will need to adopt new procedures to comply with the above proposed rules; most already have those in place for dealing with instances of financial misconduct.
However, firms should consider adjusting processes so that relevant HR and compliance professionals have access to the right information, at the appropriate time. An adverse finding about fitness or propriety or a breach of the conduct rules is potentially-career-ending in the financial services industry, so the safeguards built into a disciplinary process take on a greater importance to ensure that a fair and proportionate process is undertaken.
Moreover, the proposed amendments to the conduct rules show that the FCA expects managers to be at the forefront of addressing NFM, through: (a) prevention: by instilling an environment of psychological safety for employees; or (b) cure: by being equipped to deal with NFM complaints effectively. To achieve this, management must have ‘buy in’ and at the very least, receive training on how to manage and recognise NFM. This will, at a minimum, include training on the firm’s policies and procedures (HR or regulatory) and may also include training aimed at preventing harassment.
Investigations
If an individual’s conduct in their personal capacity is relevant to a fitness and propriety assessment, firms have additional challenges in being able to adequately investigate those complaints given that many information sources – emails, chat messages and evidence from employees – are not necessarily relevant where the alleged misconduct occurs in a private context. Firms may need to use resources not typically used in an employee investigation, such as social media, third party witnesses and CCTV – all while being aware of data protection obligations.
From a practical perspective, speaking to witnesses not employed by the firm could be challenging as they would be under no obligation to co-operate. And where those witnesses do agree to co-operate, it would be difficult for HR teams to maintain confidentiality.
Separately, and in contrast to employment law which focuses on the effect of conduct, the FCA’s proposed amendments to the conduct rules provide for an intention-based defence. Therefore, this nuance should be considered in any investigation as it could result in different outcomes from a HR and regulatory perspective. This illustrates that although HR and compliance teams should co-ordinate their approach, the outcome of any employment and regulatory investigation may differ.
Regulatory references
Another consequence of the FCA’s proposed rules is that NFM will fall within scope for potential inclusion in a regulatory reference for a former employee.
Firms will therefore need to grapple with the circumstances in which NFM should be included in regulatory references, given the severe implications that its inclusion may have on an individual’s career prospects.
A regulatory reference should capture any conduct rule breach and/or adverse finding about the individual’s fitness and propriety in the six years prior to the request, and provide details of any subsequent disciplinary action taken. In serious misconduct cases, there is no time limit for reporting.
Given that the FCA’s proposed amendments bring an individual’s conduct outside of work into the assessment of their fitness and propriety, historic NFM allegations may also have to be considered.
In addition, given that the proposed changes to the conduct rules only apply to NFM that is ‘serious’, firms should consider whether disclosures of such breaches should be made, regardless of when they occurred.
Firms should tread carefully and adopt a fair and proportionate approach when considering disclosure obligations. This may involve providing the individual with an opportunity to comment prior to the reference being issued, albeit a firm is only required to take these comments into account rather than having to include them on the reference itself.
A cross-firm effort is key
A key challenge for firms in implementing the FCA’s proposed rules will be for HR and compliance to collaborate on an approach that can satisfy the FCA’s emphasis on prompt reporting and action, while not undermining any fair process that forms part of employment and data protection law obligations.
To mitigate the likelihood of NFM arising, firms should prioritise improving culture and creating an environment of psychological safety for employees by, for example: ensuring that effective processes are in place for staff to escalate concerns, training managers on responding to instances of NFM and educating staff on diversity and inclusion.