Non-financial misconduct in the UK

The FCA's response to the Treasury Select Committee's letter dated 14 June 2023 makes very clear that it does not consider that non-financial misconduct is outside the scope of its regulatory remit.  Primarily focussing on culture and the importance of regulated firms' fostering an environment in which individuals feel able to speak up and raise concerns, the FCA does not shy away from comments it made back in 2018 to the Women and Equalities Select Committee, saying that:

"A corporate culture that tolerates sexual harassment or other non-financial misconduct is unlikely to be one in which people feel able to speak up and challenge decisions, or one in which they will have faith that concerns will be independently and fairly assessed. Such a culture also raises questions about a firm's decision making and risk management."

However, the FCA is also at pains to make clear that there are limitations to the scope of its powers or the appropriateness of it as a regulator taking action, as opposed to matters being brought via other mechanisms, noting that the FCA "is not an alternative to criminal prosecution, a firm's internal disciplinary processes or for proceedings through the Employment Tribunal."  There is, however, a not unnoticed invitation on the part of the FCA to the TSC to consider the regulatory limits of its powers with the FCA stating that "Parliament may choose to legislate if it wished to specify that certain offences should lead to an automatic prohibition from a regulated sector".  It will be interesting to see what, if any, response is given by the TSC in the forthcoming meeting on the 19 July 2023.

Since the implementation of SM&CR the vast majority of complex conduct issues on which we have advised regulated firms involve an element of non-financial misconduct and while firms have become more sophisticated after seven years of the SM&CR regime and are committed to achieving the right outcomes, non-financial misconduct it is a challenge that isn't going away.

The primary mechanism by which the FCA can hold regulated individuals to account is through their assessment of an individual's fitness and propriety.  As the FCA points out, it has brought several F&P cases against individuals for non-financial misconduct of various kinds, including sexual assault, but where all but one of these involved a criminal conviction or a caution.  The challenge for the regulated industry is that all of these cases are seriously egregious and, notwithstanding some of the issues which arose in the Frensham case before the Upper Tribunal (2021) in terms of connecting the criminal conviction with the risks associated with the ongoing regulated role that an individual performs, these cases are in many respects plainly examples of a lack of F&P.  Regulated firms are therefore left with a limited amount of guidance or precedent on how to treat alleged non-financial misconduct that, while serious, does not reach those extreme examples.  The FCA has also said, on several occasions but including in its response to the TSC, that 'non-financial misconduct can amount to a breach of our conduct rules' with limited explanation of how it might, leaving an unsatisfactory gap between the way that Certified Staff and Senior Managers are held to account (to whom F&P applies) and Conduct Rule staff (where F&P rules do not).  The long awaited guidance on this - now promised for later this year - is hotly anticipated.

In the absence of such guidance, many firms seek to set their own standards or cultural expectations from its people - with clear training and policies (and active steps to ensure that poor behaviour is escalated and dealt with promptly).  There is also the opportunity to borrow guidance from other regulated sectors, including in respect of the Solicitors Regulation Authority (SRA) who issued their own guidance on standards expected of solicitors and from recent cases such as the Lloyd's Enforcement Board's censure of Atrium.  Both of those challenge the boundaries between the regulated role in the workplace, and wider professional expectations, firm standards and behaviour outside of the workplace. 

We have seen a number of firms carry out various forms of culture "audit" to assess their risks in this space as well as doing a backward looking assessment of prior decisions relating to non-financial misconduct. There is much that can be done to improve culture and the risk of misconduct in firms, as well as in the fair handling of these issues when they arise: from whistleblowing policies, to conduct risk training and reviews, to robust investigation processes, dedicated and experienced teams who can handle sensitive misconduct cases, appropriate escalation and reporting procedures, as well as safeguards to ensure that any victims raising these types of concerns are treated with the utmost sensitivity and protection.

Notwithstanding the complexities of handling non-financial misconduct cases, Harriett Baldwin MP is right to raise questions on how the regulated industry is dealing with this.  The FCA is right to recognise its role and jurisdiction to consider these issues and but also the limits of their powers.  It is right that firms exercise the mechanisms available to them to manage these issues when they arise - whether through grievances, internal investigations or regulatory or other reporting.  It is right that culture and conduct are taken seriously and not treated as the 'soft stuff' - it is the foundation on which firms are built, thrive and fall.  But given the impact on individuals it is also right that the process that sits around these issues is followed, that individuals on all sides are protected and that investigations are robust and fairly conducted for the benefit of all those involved.