Non-financial Misconduct – A Guide for HR, Part 2 (UK): FCA proposals – what will they change?Helen Adams, David Whincup and Ryan Cuminskeyon July 3, 2024 at 8:16 am Employment Law Worldview

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The FCA’s consultation paper (CP23/20) proposes a framework to establish and define the minimum standards expected from regulated individuals in the financial services sector. Specifically, it clarifies the FCA’s expectations around non-financial misconduct (NFM). But, if implemented, will these proposals actually change anything?

We think these rules would have a direct effect on the conduct of workplace investigations and could (if properly enforced) prompt a change in the culture of regulated firms.

Investigations

The FCA’s proposed rules do not dictate how workplace investigations take place.  However, they will have to be considered throughout an investigation into this sort of conduct. Where an individual’s conduct breaches both a firm’s internal policy and the FCA’s standards, the two sets of rules will interact. With the FCA clearly setting out when NFM will be in scope of its regulatory standards, we expect that more and more workplace investigations will have to take the FCA’s rules into account, not so much in how the investigation is carried out but rather more in the conclusions they reach and the outcomes they lead to. 

When a report or grievance includes an allegation of NFM, it must now be treated even more carefully.   Hitherto it has been hard to bring complaints of bullying or harassment, for example, under the whistleblowing regime, since it could always be said that they represent just an issue between two employees and so lack the public interest element required to make them into protected disclosures.  However, if the FCA is to say that such behaviours amount to non-financial misconduct that is relevant to the proper operation of the UK’s banking and finance sector as a whole, a public interest element can no longer be denied.  That of course means much increased scope for disgruntled employees to make some allegation around bullying or harassment (and we note that both are issues very much in the eyes of the beholder) and then allege that those allegations amounted to whistleblowing and any subsequent employer conduct which displeases them is retaliation.  No one would encourage or condone such retaliation, but there would undoubtedly be a heavier obligation on the employer to be able to evidence some reason for its allegedly less favourable treatment of the employee other than his/her reports of NFM.

Making a decision following an investigation must also be done with care, and at the right time. Previously, when some questionable conduct occurred, a regulated firm had discretion as to whether it warranted disciplinary action, let alone in reporting to the FCA. Clearer guidance from the FCA as to what will be seen as significant from the regulatory perspective reduces this discretion.

If the effect of the new FCA rules is that a firm has little option in a given case but to deem someone no longer fit and proper, then it will need to remove that employee from their regulated functions. This possibility should be identified at the earliest possible stage. For example, let’s say following a disciplinary investigation into bullying in the workplace, it is held that a manager should be disciplined but not dismissed. Then, only after this investigation is concluded, the FCA’s rules are considered, and these rules dictate that in these particular circumstances the manager must now be deemed unfit to carry out regulated activities and therefore cannot do their job. You are left with an employee who is unable to do their job but has been told that their conduct was not so serious as to justify dismissal. That would lead to a very awkward conversation. To avoid such a thing occurring, you must consider how the FCA will regard the alleged conduct as soon as possible in the investigation as there is now less scope to mould the regulatory response around the internal one later down the line – in fact, the internal response will likely need to be moulded around the regulatory one. In that way, it seems that the FCA’s opinion on these matters will gain more prominence and greater influence on how regulated employers treat particular instances of misconduct. 

While the proposed guidance notionally increases clarity, it is complex and in some respects asks more questions than it answers.  Given the potentially serious professional consequences for individuals found guilty of NFM, we could see employees and their lawyers debating how the detail of the rules will apply in their specific circumstances.  New light is likely to be forced into the cracks between purpose and effect in harassment cases and for issues of broader management behaviours, the difference between bullying on the one hand and a really clunky management style on the other.  These are distinctions which may mean little to the employee on the receiving end but could be the difference between career life and death for regulated staff.  It will therefore be important for those within the firm who are responsible for spotting and responding to NFM to be comfortable about exactly what it is.  When the new rules come out in their final form, HR teams may want to seek specialist training on this.

Culture

The FCA’s proposed reform of the Conduct Rules has the aim of creating a healthy culture. This focus on culture is nothing new – in fact, it is very old. Unsurprising though, as the culture of the financial services industry is commonly held as the root cause of the global financial crisis, the exact thing the FCA seeks to prevent recurring.

However, the FCA appears to be working on the premise that removing individuals who undertake NFM will prevent unhealthy cultures – the idea that one bad apple can spoil the barrel. But what if it’s the barrel which is spoiling the apples? Where a culture is already so unhealthy that it encourages misconduct, focusing only on individuals one at a time may not address the underlying problem. The FCA’s answer in this situation is just to remove the barrel altogether, by preventing the whole firm from carrying out any regulated activities (though as stated in our previous blog, we believe this this move would be unlikely in all but the most extreme cases).

The FCA states that tackling NFM by individual will have a wider positive effect on culture. They state that NFM reduces psychological safety and inhibits the “speaking up” of employees. If nobody “speaks up”, the conduct can’t be challenged and therefore it is allowed to continue, whereas if it is seen to be tackled, then this will encourage others to come forward and therefore promote a healthy culture. Hence larger firms will need to gather data and report on their level of “inclusivity” – including whether staff feel able to “speak up”.

But could this overt focus on culture encourage firms to hide, rather than address, an unhealthy culture?  Historically, the risk of vicarious liability for the misconduct of an employee has acted as a strong incentive for firms to focus on neutralising the complaint rather than tackling the perpetrator. It may have been seen as desirable to stonewall a complainant, encourage them to sign a settlement agreement, and (all too often) leave their employment.  So will more stringent rules and harsher sanctions regarding “culture failures” only increase the appetite for firms to suppress a complaint?  To tip the balance, and force firms to address issues head on, the FCA’s proposals will need to come with some powerful incentives or disincentives.  Firms will either need to wholeheartedly buy in to the concept that a good culture is good for business or be convinced that poor handling of non-financial misconduct will come to the attention of the FCA and be sanctioned.

This remains a proposed framework, but the FCA’s focus on tackling NFM is clear. Only time will tell whether more established rules around NFM create any change – in conduct or culture. The second 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 provide additional useful and supplementary resources.

If you missed Part 1 of this series, it’s available to read here.

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