New FCA rules on misconduct highlight ‘two tier’ regulatory landscape for UK

A major regulatory change is coming for the financial services sector. From 1 September 2026, the FCA’s Conduct Rules will apply not just to banks, but also to thousands of solo-regulated firms across financial services – around 37,000 of them. These rules set clear standards for individual behaviour, and under the changes, serious non-financial misconduct - things like bullying, harassment or violence - will now fall within their scope. 

That’s a step change. For the first time, behavioural misconduct, including some conduct outside the workplace, may trigger regulatory consequences. That has major implications for how misconduct is handled by HR, for internal investigations, for references, and for individual careers.

This all stems from the FCA’s new consultation paper ‘Tackling non-financial misconduct in financial services’, published earlier this month. It confirms that the Conduct Rules will be extended to solo-regulated firms, and that behaviour breaching those rules will be taken just as seriously as financial misconduct when it comes to fitness and propriety.

So what are the implications? And are we about to see a divide between different types of staff, some inside the regime, others outside? So, one group of staff whose behaviour is scrutinised under the FCA’s regime, and another group whose behaviour is not. It’s a point flagged by Anne Sammon in her article for Out-Law. She says: ‘This leaves a two-tiered system when a NFM outside of work is relevant for senior staff, insofar as it relates to their fitness and propriety, but not more junior staff.’

Earlier I caught up with Anne and put it to her that from 1 September next year the FCA will expect firms to treat junior staff and senior differently:?

Anne Sammon: “That's right in that anyone who is a senior member of staff is likely to be certification staff and therefore they will be subject to the tests around fitness and propriety. Fitness and propriety extends beyond anything that you do at work to your private life as well, whereas more junior staff are probably only going to be subject to the conduct rules and the FCA has clarified that in relation to the conduct rules it's only when you're carrying out matters in relation to SMCR activities that you're covered. That means, explicitly, that anything you do in your private life is nothing to do with your SMCR activities and therefore isn't something that a firm can consider when it's looking at whether or not there's been a breach of the conduct rules.”

Joe Glavina: “So how should HR respond when a senior employee is accused of bullying or harassment. Is it going to be any different?”

Anne Sammon: “So it's unlikely to be significantly different at the outset of any process because your disciplinary process, and your HR processes, will still be exactly the same. You still need to go through the same investigation and consider what's happened, consider whether you need to start a disciplinary process. Disciplinary sanctions will still be the same irrespective of the level of seniority of the member of staff and whether or not you have to consider issues of fitness and priority. The piece that will be different is, potentially, at the end of those proceedings that's when you get into your regulatory processes around whether or not there's been a code of conduct breach and whether or not there's any adverse finding on fitness and propriety. What is a bit strange for some firms to get their heads around is the fact that you may now have situations where you are making findings that people aren't fit and proper because their activities extended beyond the kind of SMCR remit, but you're not at the same time making a conduct rule breach finding, and that that is a rather peculiar aspect of this. So, for example, if you were to make a finding that someone had acted without integrity and therefore that there was an adverse finding on their fitness and propriety, they might not necessarily have also breached the individual conduct rule that says you must act with integrity, because that conduct rule only applies in relation to SMCR activities. I suppose also worth flagging is that when we're talking about these limitations on the conduct rule breaches, that only applies for the non-banking side of the SMCR regime. Banks are subject to a slightly wider regime and therefore don't have this rather strange dichotomy that has been highlighted by the latest guidance.”

Joe Glavina: “I can see a situation arising, Anne, where you've got two people who basically do the same thing, behaving inappropriately, and it seems as though the FCA is expecting firms to treat the two of them differently. That's going to be tricky for HR, isn't it?”

Anne Sammon: “It's going to be particularly difficult in a situation where the behaviour is such that you would make a finding that the senior manager was not fit and proper, but you are still not in dismissal territory. So we will sometimes see occasions where we've gone through a disciplinary process, a disciplinary outcome has been that that both employees are maybe subject to a final written warning, and for the employee who's subject to fitness and propriety, that then goes to the fitness and propriety panel, who decide that that individual isn't fit and proper in all the circumstances and, if someone isn't fit and proper, that inevitably results in the individual needing to either be removed from that role through finding them a role that isn't regulated in the same way or dismissed. That’s where we will find real kind of differences and a potential two-tier approach in that you'll have the more senior employee who will have quite a severe sanction, possibly dismissal, and the more junior employee who will have just received that final written warning.”

Joe Glavina: “This is coming in on 1 September next year, Anne. Is there any action for HR to take, or anybody within the business to take, in advance of that deadline?”

Anne Sammon: “I think this is a really good at which to kind of do an audit of any SMCR processes that you've got to make sure that they are still fit for purpose. We saw a lot of firms when SMCR was introduced, which is now some time ago, did a lot of work around embedding those processes but, potentially, haven't updated them to take account of kind of changes in regulatory expectations and also to work through whether they work for their organisation in their current form. There is a bit of an expectation that we may have more conduct rule breaches as a result of the change in rules from 1  September 2026 and therefore making sure that those processes are fit for purpose is really important if they're going to come under strain as a result of significant increases in conduct rule breach considerations.”

The consultation paper ‘Tackling non-financial misconduct in financial services’ was released by the FCA on 2 July and is available now on their website. It sets out the final rule changes, along with draft guidance, and confirms that from September next year, serious behavioural misconduct will fall within the FCA’s Conduct Rules for all authorised firms.

The FCA is inviting responses to the consultation by 10 September 2025. That gives HR, Compliance and Legal teams a short window to consider how the proposals may affect their organisation, particularly the practicalities of implementation, and to share any concerns or suggestions. You can respond online through the FCA’s website. We’ve added a link to the consultation paper in the transcript of this programme if you’d like to take a closer look.

LINKS
- Link to Out-Law article: ‘FCA rules covering bullying and harassment extended to regulated financial firms’
- Link to FCA consultation paper CP25/18: Tackling non-financial misconduct in financial services