“Non-financial misconduct is misconduct, plain and simple” – that is what Christopher Woolard (former FCA director) said in 2018. Except that as it turns out, fairly predictably when dealing with shades of human behaviour, it’s not that plain, nor that simple. With a lack of guidance on what non-financial misconduct (NFM) actually is, firms have thus far been left to their own devices to define NFM as best they can, and they have been the arbiters of when conduct becomes a regulatory breach. This has led to firms taking differing approaches and applying differing standards, some very much more puritanical than others.
Given this inconsistency and uncertainty, the industry urged the FCA to provide clarity, guidance, and in particular, some tangible examples of NFM. The proposals set out by the FCA in its consultation paper (CP23/20) last year aim to do exactly that. While these proposals still fail to provide a single definition of the term, they do set out when NFM might be relevant to the FCA’s existing rules – specifically, the Conduct Rules, Fitness and Propriety assessments and the Threshold Conditions – and are to that extent useful.
It is important to emphasise again that, at the moment, these are just proposals. The FCA is still considering, for example, how its proposals tie in with existing employment law. So, there is scope for some change, though probably not much. Regardless, as the FCA’s position is that its proposals just clarify its existing expectations rather than amend them, it is certainly worth examining them briefly.
Conduct Rules
To recap, the Conduct Rules seek to regulate the conduct of individuals working in regulated businesses. They apply to all staff other than ancillary staff (receptionists, cleaners, etc.), and therefore go beyond just those carrying out formally regulated activities as SMFs or certified staff.
The FCA’s NFM proposals clarify, in broad terms, that serious cases of misconduct (broadly summarised as serious cases of ‘bullying or harassment’) towards colleagues, employees of group companies and contractors might breach the Conduct Rules – but only to the extent that the conduct relates to the part of the firm’s business that carries out regulated activities and occurs in a work context, rather than relating to the individual’s private or personal life. To that end, the general position is that misconduct outside of work isn’t NFM that could breach the Conduct Rules – although, as employment lawyers and HR professional know well, the dividing line between work and someone’s personal life can be notoriously difficult to draw, especially where the individual and hence employer is in the press or on social media as a result.
The FCA has sought to assist with that distinction by setting out a list of relevant factors, such as whether the conduct occurred on the firm’s premises, involved firm clients or someone the person had dealt with on behalf of their firm, or was committed using the firm’s equipment and so on. Without wishing to be in any way ungrateful, of course, these do rather state the obvious. The FCA has also provided a table that sets out examples of conduct that falls within the scope of the Conduct Rule and that which does not, on account of its occurring in someone private or personal life. These make it clear that for the purposes of the Conduct Rules at least, domestic violence or sexual misconduct in relation to a member of the public committed whilst commuting would not be a breach of the Conduct Rules (but read on, as that sort of conduct would very likely be relevant to the Fitness and Propriety provisions). Whilst the guidance and examples provided by the FCA might assist to some limited extent, we do have to question whether this tricky distinction (work life -vs- home life) that the courts and Tribunals have sought to clarify through years of case law can be neatly codified in two sides of A4.
As well as guidance on where the line between a work context and someone’s personal life might be drawn, the FCA has provided a list of the factors that tend to suggest conduct is serious enough to breach the Conduct Rules. These include, as you might expect, conduct that is repeated (particularly after previous warnings), where the perpetrator is senior to the subject of the misconduct in question and where the conduct is discriminatory as opposed to simply unpleasant without any connection to a protected characteristic. There is no obvious attempt yet to address the issue at the heart of any attempt to make discriminatory harassment into NFM, i.e. that the conduct in question may be wholly inadvertent or even positively well-intended.
There is also more specific guidance proposed on when conduct might breach Conduct Rule 1 (the requirement to act with integrity) and when a failure to act appropriately against NFM might see a manager breach Conduct Rule 2 (the requirement to act with due skill, care and diligence).
Fitness and Propriety
The FCA’s proposals make it clear that conduct that breaches its own standards might mean that the individual is not fit and proper to perform their role. That includes:
- a breach of the Conduct Rules;
- a failure by an individual to meet a standard that must be met for their role;
- involvement by that individual in a breach by the firm of its regulatory requirements; and
- involvement in “discriminatory practices”.
It is perhaps worth noting here that the FCA defines “discriminatory practices” as discrimination, harassment or victimisation linked to an individual’s “demographic characteristics”. “Demographic characteristics” are not the same as protected characteristics under the Equality Act 2010 (age, sex, race etc.)). It is a broader concept that also appears to include things such as someone’s socio-economic background. So, class discrimination, in effect. While potentially seen as radical, it is a concept being discussed more and more amongst employment lawyers. How it will work in an industry as additionally divided between Old Money and New Money is yet to be seen.
Unlike the Conduct Rules, the requirement for a senior individual to be ‘fit and proper’ certainly does stretch into an individual’s personal and private life. The clarity regarding NFM gives us a better understanding of the types of unpalatable personal conduct that the FCA considers falls within its remit– here domestic violence and sexual misconduct outside of work very likely would be relevant, especially if they attracted any publicity and so affected the individual’s reputation. A personal matter might show that an individual lacks fitness and propriety to perform their role if (in broad terms):
- it might be repeated in work;
- it is morally reprehensible; or
- the fact of the individual working in the sector and having behaved in that way might undermine confidence in the sector or the financial system.
Therefore, any violence, dishonesty or discrimination (regardless of where it occurs) could in principle render an individual unfit under the Fitness and Propriety test.
Threshold Conditions
The FCA has also set out proposals on how instances of NFM occurring within a firm will be relevant to the Threshold Conditions – so, the assessment of whether the firm itself is suitable to perform its regulated activities.
Specifically, the proposed guidance seeks to expressly include violent and sexual offences as well as discriminatory practices into factors the FCA will consider when assessing whether a firm will satisfy, and continue to satisfy, this Threshold Condition.
Does the new definition work?
The answer to this is fairly nuanced – “yes” and “no”. The proposed rules are detailed, but not necessarily simple. The rules overlap, but don’t always tally up, with employment law. They will help guide firms, but won’t always fit into their current infrastructure. There are a very large number of coulds and mights and relevants, with the final determination of fitness and propriety still left firmly with employers. Different standards may apply (at the margins) to different strands of the FS industry where different risks and exposures apply. But what is clear across the piece is that employers will need to be able to show that they have separately applied their mind to the specific facts in each case – a blanket policy that all harassment or dishonesty or discrimination or even violence of any kind necessarily amounts to NFM is to take far too simplistic a view. That would both undermine the FCA’s objectives (to clean the industry up, not clear it out) and lead employers into significant issues in the Employment Tribunal. It would also potentially clog up whatever system the FCA proposes to deal with challenges to employers’ determinations on the question, since it cannot be said as a matter of law or fact that all those behaviours necessarily go to one’s fitness to practice. The FCA’s new guidance, when implemented, will be a steer to employers, something else to think about, but in our view it will not require or permit them to do anything to their employees which would not already be lawful.
For these proposed definitions to be effective, they must be embraced – it doesn’t matter how comprehensive the new definition of NFM is unless it is understood by those responsible for identifying and responding to it. When these rules are published, we encourage all those in the industry to ensure they are familiar with the rules, the guidance and their potential ramifications. It might be worth pencilling in training sessions for later in the year when the final rules are likely to be published.
It is also worth being aware that the FCA’s proposals coincide with the new duty for all employers to take reasonable proactive steps to prevent sexual harassment in the workplace. That duty will come into force in the autumn. For our clients in the financial services sector, we propose that they weave into that training, guidance for the general workforce on the potential professional consequences of engaging in NFM, expressly including (though not limited to) sexual harassment.
If you want to discuss what training you might offer your workforce, please do get in touch.
The third video to accompany this series is available here.
Resource Centre
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