“Non-financial misconduct is simply misconduct” – these are the words of Christopher Woolard (former director of the FCA) in 2018. However, when dealing with the nuances of human behaviour, it turns out, unsurprisingly, that it’s not so clear-cut or simple. Due to a lack of guidance on what non-financial misconduct (NFM) actually is, firms have historically defined NFM as best they can and made decisions about whether conduct constitutes a breach of regulation. This has led to firms taking different approaches and applying different standards, some much stricter than others.
Given this inconsistency and uncertainty, the industry has called on the FCA to provide clarity, guidance and in particular some concrete examples on NFMs. The proposals set out by the FCA in a consultation document (CP23/20) last year aim to do just that. Although these proposals do not yet provide a single definition of the term NFM, they are useful in that they indicate when NFMs may relate to the FCA’s existing rules (specifically the conduct rules, suitability assessments and benchmark conditions).
It is important to stress again that at this stage these are just proposals. The FCA is still considering, for example, how its proposals will interface with existing employment law, so there is some room for some change, but probably not much. In any event, the FCA’s position is that its proposals would not amend existing expectations, but simply clarify them, so they are certainly worth a brief consideration.
Rules of Conduct
In summary, the Code of Conduct is intended to regulate the behaviour of individuals working in a regulated business. The Code applies to all staff other than ancillary staff (receptionists, cleaners etc.) and therefore does not just apply to those carrying out formally regulated activities as SMFs or accredited staff.
The FCA’s NFM proposals make clear that, broadly speaking, serious misconduct towards colleagues, group company employees and contractors (broadly speaking, serious “bullying or harassment”) may breach the conduct rules, but only where the conduct relates to that part of the company’s business which carries out regulated activities and occurs in a work context, rather than relating to an individual’s private or personal life. The general view is therefore that misconduct outside of work is not an NFM which may breach the conduct rules. However, as employment lawyers and HR professionals well know, drawing the line between work and personal life can be very difficult, particularly where individuals, and therefore their employers, appear in the press and on social media.
The FCA has tried to help with that distinction by setting out a list of relevant factors, such as whether the conduct took place on the company’s premises, involved the company’s clients or people trading on behalf of the company, or whether it was done using company equipment. Of course, without intending to be ungrateful, these state the rather obvious. The FCA also provides a table with examples of conduct that falls within the scope of the conduct rules, and those that fall outside because they occurred in private or personal life. These make it clear that, at least for the purposes of the conduct rules, domestic violence or sexual misconduct against a member of the public committed while commuting to work does not breach the conduct rules (although this type of conduct is likely to be relevant to the fitness and proper provisions, so read on). The guidance and examples provided by the FCA may be of some help, but I doubt whether this fine distinction (work vs. home) that courts and tribunals have been trying to clarify through years of case law can be neatly summarised on two A4 sheets of paper.
As well as guidance on where to draw the line between work and personal life, the FCA also provides a list of factors which tend to suggest behaviour is serious enough to breach the conduct rules. These include, as you might expect, repeated behaviour (particularly after previous warnings), where the perpetrator is senior to the person subject to the misconduct in question, where the behaviour is discriminatory rather than simply offensive with no relation to a protected characteristic, etc. There has yet been no apparent attempt to address the issue at the heart of attempts to incorporate discriminatory harassment into the NFM, namely that the behaviour in question may be totally inadvertent or actively well-intentioned.
It also proposes more specific guidance on what conduct may breach Conduct Rule 1 (the requirement to act in good faith) and whether failure to act appropriately vis-à-vis NFMs may cause a manager to breach Conduct Rule 2 (the requirement to act with due skill, care and diligence).
Eligibility and suitability
The FCA’s proposals make it clear that conduct that breaches its own standards could mean that an individual is unfit to perform the role. This includes:
breaches of rules of conduct, where an individual has failed to meet the standards that must be met in the role, where the individual has breached the company’s regulatory requirements, and where they have engaged in “discriminatory practices”.
It’s worth noting here that the FCA defines a “discriminatory practice” as discrimination, harassment or victimisation in relation to an individual’s “demographic characteristics”. “Demographic characteristics” are different to the characteristics protected by the Equality Act 2010 (such as age, sex or race). This is a broader concept and appears to include things like an individual’s socio-economic background – effectively class discrimination. It may seem extreme, but it’s a concept that’s increasingly debated among employment law experts. It remains to be seen how this will play out in an industry that is further divided between the old wealthy and the newly wealthy.
Unlike the conduct rules, the requirement that senior managers must be “fit and proper” certainly extends to an individual’s private life. Clarity on the NFM allows us to better understand the types of objectionable personal conduct that the FCA considers to fall within its jurisdiction. Here, domestic violence and sexual misconduct outside the workplace are very likely to be relevant, especially if it attracts high profile and impacts on an individual’s reputation. Personal issues may show that an individual lacks fitness and fitness to perform their duties if (broadly speaking):
It may be repeated at work and be morally reprehensible, or the fact that such behaviour has been engaged in by individuals working in the sector may undermine confidence in the sector or the financial system.
Thus, any violence, misconduct or discrimination (regardless of where it occurs) could in principle disqualify an individual under the suitability and appropriateness test.
Threshold Condition
The FCA also sets out proposals for how instances of NFM occurring within a firm relate to the threshold condition, i.e. the assessment of whether the firm is itself suitable to carry out regulated activities.
Specifically, the proposed guidance seeks to explicitly include violent crimes, sexual offences and discriminatory practices among the factors that the FCA will consider when assessing whether a firm meets, and will continue to meet, this threshold condition.
Will the new definition work?
The answer to this is rather nuanced: yes and no. The proposed rules are detailed but not necessarily simple. The rules overlap with employment law but do not necessarily coincide. The rules guide companies but do not necessarily fit the current infrastructure. There are so many possibilities and possibilities and relevant matters and the ultimate decision of eligibility and appropriateness still rests with the employer. Different standards may apply (marginally) to different areas of the financial services industry where different risks and exposures apply. But what is clear throughout is that employers need to be able to show that they have paid attention to the specific facts of each case individually. A blanket policy that harassment, fraud, discrimination and even violence of any kind necessarily constitutes casual employment is too simplistic a view. Not only would it undermine the FCA’s purpose (to clean up, not wipe out, the industry) but it would also land employers in serious trouble at the employment tribunals. It could also disrupt any system the FCA proposes to deal with challenges to employer decisions. This is because not all of these actions necessarily relate, either in law or fact, to a person’s ability to perform their job. The FCA’s new guidance, once implemented, will provide guidance for employers and new things to consider, but in our view it will not require or permit employers to do anything with their employees that is already unlawful.
To be effective, these proposed definitions must be embraced. No matter how comprehensive the new definitions for NFM are, they will be meaningless if they are not understood by those responsible for identifying and responding to them. Once these rules are published, we encourage all industry participants to familiarize themselves with the rules, guidance, and their potential impacts. It would be a good idea to schedule training sessions for later this year, when the final rules are likely to be published.
It is also worth noting that the FCA’s proposals are consistent with the new duty for all employers to take reasonable and proactive steps to prevent sexual harassment in the workplace, which comes into effect in the autumn. We suggest that our clients in the financial services sector incorporate in their training guidance for rank-and-file employees on the potential professional consequences of engaging in NFM, including (but not limited to) sexual harassment.
You can watch the third video in this series here:
Read part 1 and part 2 of this series.
Ryan Cummiskey contributed to this article.
