Martin Pratt Partner
FCA Confirms that Non-Financial Misconduct is, actually, Misconduct
On 5 November the FCA banned three men convicted of sexual and (in one case) domestic violence offenses from working in the financial services sector ever again. To a casual observer it would seem unsurprising that a regulator would find such serious offenses a breach of its ‘fit and proper’ persons test. Such convictions would almost certainly end the careers of a solicitor or a doctor - but historically the FCA and its predecessors have not been as keen prosecute “non-financial” misconduct with quite the same vigour as those who have been playing fast and loose with a client’s money.
The bans meted out to Russell David Jameson, Mark Horsey, and Frank Cochran mark a sea-change. The FCA has been making it clear for some time that its attitude in this respect has been hardening. Two years ago Megan Butler, the FCA’s Director of Supervision - Investment, Wholesale and Specialist, reassured the House of Commons’ Women and Equalities Committee that sexual harassment is misconduct that falls firmly within the scope of the FCA’s regulatory framework. In January this year the FCA followed up with a “Dear CEO” letter that made it clear that such behaviours would be taken as indicators of an unhealthy culture and, as such, a key root cause of harm to consumers, market participants, employees and markets themselves.
While Jameson, Horsey, and Cochran were convicted of serious criminal offences, the new FCA emphasis goes far beyond punishing proven criminal misconduct. The regulator is seeking to prevent and alter the workplace cultures that are a key cause of harm. January’s letter explicitly stated that –
“How a firm handles non-financial misconduct throughout the organisation, including discrimination, harassment, victimisation and bullying, is indicative of a firm’s culture. We view both lack of diversity and inclusion, and non-financial misconduct as obstacles to creating an environment in which it is safe to speak up, the best talent is retained, the best business choices are made, and the best risk decisions are taken.”
So is clear that firms need to be aware that tolerance of sexual harassment and other forms of “non-financial” misconduct will amount to a breach of the FCA’s Conduct Rules and the Senior Managers and Certification Regime (“SMCR”) - putting an even greater onus on regulated entities and managers, and their HR teams, to put an end to the toxic cultures that have too often gone hand in hand with City working life.
Senior managers, including those in HR teams, are going to be held responsible for effecting the financial services culture change the FCA is seeking and, if they do not, they may be found not to be “fit and proper” themselves. FCA regulated managers and their HR teams should take the following steps to make sure they do not breach what is expected of them and their firms -
- Refresh your organisation’s policies so there are proper whistleblowing and anti-harassment procedures in place that allow your firm to identify and appropriately handle allegations of non-financial misconduct by employees, officers and consultants inside and outside the office.
- If they are not included already, non-financial performance indicators should be included in appraisals.
- Training is vital. Not only should staff be trained to be able to identify what is and is not appropriate behaviour, they should also be given indicators as to where concerns should be raised, and appropriate managers and staff should be given training on how to handle what may well be highly sensitive complaints.
- Fitness and propriety assessments of staff, both incoming and existing, need to be broader. It is no longer enough simply to rely upon the standard SYSC 22 Annex 1 Template for regulatory references given by SMCR firms, and firms should proactively seek whatever data around non-financial misconduct is available. There will always be barriers around the GDPR rights of a recruit, not to mention their rights under the Rehabilitation of Offenders Act, but within those limits it is vital that such enhanced vetting takes place.
- FCA and PRA regulated firms should proactively consider the types of non-financial misconduct that would trigger a re-assessment of an individual’s fitness and propriety.
- Data surrounding non-financial misconduct should be collected to allow management a complete picture of the risk.