Non-financial Misconduct – A Guide for HR, Part 1 (UK)Helen Adams, David Whincup and Ryan Cuminskeyon June 26, 2024 at 3:34 pm Employment Law Worldview

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Not just more management consultancy buzz words, “non-financial misconduct” is becoming an increasingly important term for everyone working in HR in the financial services sector.

As most readers will be aware, it is the role of the FCA to ensure that the UK financial markets work well. In pursuit of this, and to protect the integrity of the UK financial system, it regulates the conduct not just of businesses but also of individuals employed in regulated firms. There is a requirement for employees to adhere to certain Conduct rules and (for more senior individuals or those performing regulated activities), to reach certain standards of fitness and propriety. For the FCA, the key considerations are the person’s:

a)            honesty, integrity and reputation;

b)            competence and capability; and

c)            financial soundness.

Originally, everyone involved (including the FCA) proceeded on the basis that only misconduct relating directly to a firm’s financial services activities might breach the conduct rules or cause someone to be found no longer fit and proper – in other words, acts directly linked to the FCA’s objective of protecting consumers. It has since been established that wider acts of dishonesty outside work can also breach the Conduct rules or the fitness and propriety standards – to pluck a circumstance out of the air, that might include using insider information to bet on the date of a general election, or something else equally offensive to common views of what constitutes integrity. Or when the FCA famously issued a Prohibition Notice (which bars an individual from conducting regulated activities) to an investment manager for deliberately evading train fares over an extended period  – on the basis that this demonstrated a lack of honesty and integrity (and wasn’t due to lack of funds on his part, as he was reportedly on circa £1m a year at the time) and, as such, fell below the standard of conduct expected and required in order to maintain public confidence in the banking system.

However, it has become clear that the FCA increasingly views non-financial misconduct (NFM) in the same way as financial misconduct. The term is a broad concept which has not so far been well-defined. Fairly obviously, it is likely to include serious and deliberate acts of discrimination or harassment, but it is not clear exactly how far the FCA’s proposed remit extends. Would less serious acts of bullying or inappropriate behaviour which take place away from work and are completely unrelated to an individual’s employment still be caught? What about regular lawful gambling, leaving the scene of a road accident, a slightly excessive interest in Nazi memorabilia, or adultery? Do all of them not say something about a person’s character and suitability to be trusted by the public?

The FCA released a consultation paper last year which proposed to integrate NFM considerations into the existing Conduct rules and fitness and propriety test. The paper set out suggested boundaries as to what would fall under the extended Conduct rules, for example that misconduct towards a colleague when travelling to a meeting would be in the scope but behaving the same way to a family member while working remotely would generally not be. The fitness and propriety test proposals seem to extend further into an employee’s private life, suggesting that bullying in one’s personal or private life would be relevant to the FCA’s assessment of fitness and propriety. In fairness, there does not seem to us to be any immediate reason for making the professional-v-personal distinction – if the whole idea is to weed out the “wrong sorts” of people, then that must include consideration of how they conduct themselves generally, not just whether they can restrain themselves during working hours. However, one possible consequence of NFM being so widely construed is an enormous increase in the number of disclosures made to employers for which whistleblowing protection is sought. We will address that in a later post in this series.

While it may appear invasive of a professional regulator to seek the right to act upon conduct occurring in an individual’s personal life, this isn’t uncommon – the SRA regulates the overall conduct of solicitors and the GMC does so in the regulation of health and social care professionals, so the FCA’s position is not without precedent.

Employment law and the NFM rules

With the FCA focusing on non-financial misconduct, it is important to understand the inter-play between the FCA rules and the existing (and comprehensive) body of employment law which deals with the same areas. Employment law already defines what conduct amounts to discrimination or harassment, or when bullying might be serious enough to justify dismissal. And in that legal context, businesses have developed their own internal policies and procedures on acceptable conduct at work. Many businesses are well versed in following both the law and their policies when an employee commits misconduct.

The FCA’s extended rules do not seek to change any of that. Their purpose is to determine the regulatory consequences of certain conduct or behaviours, not to alter employment law or practice. The proposed changes in the rules could result in additional requirements to report breaches of the conduct rules to the FCA, or a higher chance of an employee being rendered unfit to carry out their role. These are also things which would now have to be disclosed on a regulatory reference.

Finally, in its recent consultation paper the FCA proposed to extend the Suitability Threshold Condition so that if certain types of non-financial misconduct, specifically discriminatory practices, occur regularly within a firm, that firm as a whole may no longer be considered suitable to perform its regulated activities. Since that could put dozens or hundreds of people out of a job for no fault of their own, we see this as very much the nuclear option and wildly unlikely to be applied in practice in anything but the most extreme circumstances and only then after the FCA has fired a number of warning shots across the firm’s bows.

Although the FCA’s rules and employment law are distinct and have their own consequences, they do affect each other in some respects – as will become clear over the course of this short series of blogs and videos. The first video to accompany this series is available here.

Resource Centre Our dedicated Financial Services and Employment Resources webpage will be updated on a regular basis to upload our video series and additional useful and supplementary resources.

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