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28 Sep 2023

Non-financial misconduct – FCA proposals on conduct impacting individuals' fitness and propriety and breach of conduct rules

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A new FCA Consultation Paper concerning "Diversity and inclusion in the financial sector – working together to drive change" ("the CP") was published on 25 September 2023. Given its title, it is perhaps somewhat surprising that it contains some potentially wider-ranging proposals around non–financial misconduct, including revising the approach taken to the FCA's fitness & propriety assessment for individuals and the application of its conduct rules in relation to non-financial misconduct.

The FCA had published an earlier Discussion Paper ("the DP") exploring amongst other issues whether they needed to make explicit that adverse findings about individuals’ conduct for issues such as bullying, sexual harassment and discrimination should form part of their fitness and propriety assessments. The DP also discussed whether evidence of such behaviour, or a failure to address it, could constitute a breach of the FCA's Conduct Rules under COCON and whether it should be disclosed in future regulatory references.

In relation to the minimum requirements to carry on regulated activities (the "Threshold Conditions"), the DP also explored whether evidence of a firm engaging in discriminatory activities should explicitly form part of that suitability criteria.

In the new CP, the FCA propose to explicitly include non-financial misconduct within:-

 1. Individuals' fit and proper assessments;

2. Application of the Conduct Rules; and

3. Suitability guidance on the Threshold Conditions

They will also provide guidance on how non-financial misconduct should be incorporated into regulatory references.

The FCA say their proposals reflect "our publicly expressed view that non-financial misconduct is misconduct and not an additional principle". Their stated aim is to give firms the reassurance needed to take decisive and appropriate action against employees for instances of non-financial misconduct.

Fitness and propriety

The FCA propose to explain in more detail how non-financial misconduct forms part of the Fit and Proper test for Employees and Senior Personnel (FIT). FIT provides guidance on how firms should assess honesty, integrity and reputation. Misconduct both within and outside the workplace can be relevant for FIT and the FCA's proposals do not change this existing position.

The proposal is to explain that "bullying and similar misconduct within the workplace is relevant to fitness and propriety and that similarly serious behaviour in a person’s personal or private life is also relevant. We propose giving examples of non-financial misconduct, such as sexual or racially motivated offences."

The FCA also say that when assessing approved person applications against FIT, they will only approve an application when we are satisfied that the individual is fit and proper to perform the role in question. Presumably, they will apply the same guidance around non-financial misconduct in this context.

The FCA say that one of the purposes of FIT is to maintain confidence in the financial system in the UK and that in their view, there is a risk to public confidence where individuals have committed serious non-financial misconduct, whether inside or outside the workplace, such as sexual or racially motivated offences, but are permitted to continue working within the sector. Accordingly, they say such conduct is unlikely to be compatible with the FCA's statutory objectives and they can impose a partial or a full prohibition, depending on the level and type of risk posed by the individual in question.

Their proposed changes will clarify that conduct that could damage such public confidence is likely to mean that the person is not fit and proper. The FCA also say that articulating their views clearly in FIT will reduce the risk of inconsistency in how non-financial misconduct is interpreted and applied in firms and within judicial settings.

Conduct Rules

Currently the scope of the Conduct Rules in COCON is restricted (except in the case of banks) to regulated activities, other so-called SM&CR financial activities and certain kinds of misconduct that could have serious effects. The FCA propose to expand the scope of COCON to "make clear" that it covers "serious instances of bullying, harassment and similar behaviour towards fellow employees and employees of group companies and contractors".

They will add guidance on the types of behaviour that would fall within the expanded scope of COCON, and "what conduct is out of scope because it relates to an employee’s personal or private life".

They propose to include guidance that not every instance of misconduct towards a fellow member of the workforce will amount to a breach of COCON - only serious misconduct would amount to a breach, and the FCA will provide examples of this. Factors to consider will include, for example, whether the conduct is repeated, the duration of the conduct and the extent of its impact upon the subject of the conduct.

The FCA make clear that they will only take disciplinary action for serious breaches of COCON and will therefore only take such action for particularly serious instances of bullying, etc., or multiple instances that are, collectively, particularly serious. They add that breaches of COCON may also lead to an individual being considered not fit and proper, which may in turn result in withdrawal of approval and/or prohibition.

Guidance on the Suitability Threshold Condition

The FCA also propose extending the guidance on the Suitability Threshold Condition in COND, including, for example, offences relating to a person or group’s demographic characteristics (such as sexual or racially motivated offences) and tribunal or court findings that the firm, or someone connected with the firm (such as a director), has engaged in discriminatory practices. The FCA see this as relevant to maintaining market integrity and conduct in UK markets.

The FCA have noted the concerns of unintended consequences raised in feedback to their DP of any measures linking regulatory approval of a firm to the demographic characteristics of its senior management population or wider staff. They say they are not bringing forward any such proposals.

The FCA (and PRA) seek views of market stakeholders on these our proposals to expand the coverage of non-financial misconduct in FIT, COCON and COND.

Our commentary

The FCA's approach to non-financial misconduct is in much need of clarification, in particular following the Upper Tribunal decisions in cases such as Jon Frensham v The Financial Conduct Authority and Stuart Malcolm Forsyth v (1) The Financial Conduct Authority and (2) The Prudential Regulation Authority.

However, the cases suggest that where fitness and propriety is brought into question upon the basis of an alleged lack of integrity, the question of integrity is specifically linked to what was required by the standards of the profession concerned, where integrity connotes adherence to the ethical standards of the relevant profession. Failing to act with integrity in personal life in a manner which is not relevant to how the person concerned is required to conduct himself in his professional life should not in itself engage regulatory action (see Wingate v SRA [2018] 1 WLR 3696). In Ryan Beckwith v SRA [2020] EWHC 3231 (Admin), the Court similarly held that the obligations to comply with the SRA Principles attached only to matters that touched upon professional practice as a solicitor and the facts found by the SDT did not demonstrate that to be the case. In Frensham itself, the Upper Tribunal noted that the FCA's policy in relation to the exercise of its power to withdraw approvals or impose prohibitions was to do so to achieve any of its regulatory objectives, such as the integrity objective under Section 1D FSMA. The Upper Tribunal also identified a principle that:-

"Provisions requiring professional persons to act with integrity or to be of sufficient repute may reach into private life only when conduct that is part of a person’s private life realistically touches on their practice of the profession concerned. The conduct must be qualitatively relevant because it engages the standard of behaviour set out in the regulatory code concerned".

Insofar as the FCA propose to treat "bullying and similar misconduct within the workplace" as relevant to fitness and propriety and that "similarly serious behaviour in a person’s personal or private life is also relevant", it is not clear whether that will be consistent with, or extend beyond, what case law treats as relevant as outlined above. If it is the latter, there could still be uncertainty that will needs to be resolved by the Upper Tribunal or elsewhere.

Furthermore, the FCA refer in the context of individuals' fitness and propriety to maintaining confidence in the UK financial system. They take the view that there is a risk to public confidence where individuals have committed serious non-financial misconduct, whether inside or outside the workplace, such as sexual or racially motivated offences, but are permitted to continue working within the sector. They say such conduct is unlikely to be compatible with their statutory objectives and that they can impose a prohibition, depending on the level and type of risk posed by the individual in question.

In Frensham, the Upper Tribunal considered the FCA's case alleging his offence impacted public confidence, pointing out that the FCA's case was put simply by reference to an assertion that the public are entitled to expect that approved persons are individuals of the utmost integrity and reputation. The Upper Tribunal observed "That simply amounts to saying that the offence must be regarded as being so awful and would be regarded as such by fair-minded members of the public with knowledge of the facts, that the only answer to the question posed must be that the person concerned must be prohibited from working in the industry. That is presumably because public confidence in the industry would be significantly harmed if such a person was allowed to continue to work in the industry. However, the Authority’s guidance does not make it clear that particular offences are considered by the Authority to be so serious that without more they would automatically disqualify the person concerned from working in the industry.", adding that the FCA's case would "benefit from a more independent, analytical justification of the link between the offence and public confidence" and concluding that they would not have made a prohibition order on the basis of the conviction alone.

It remains to be seen if the detailed proposals from the FCA will follow this approach.

Author David Capps

These materials are for general information purposes only and are not intended to provide specific legal advice nor to be a comprehensive review of all developments in the law and practice, nor to cover all aspects of those referred to. Please take legal advice before applying anything contained in these materials to specific issues and transactions.

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