New FCA misconduct rules raise stakes for workplace investigations

The FCA’s new rules on non-financial misconduct are now in force and, for thousands of financial services firms, the focus is shifting from preparing for the new regime to applying it in practice. The rules took effect on 1 September extending the conduct rules in non-bank firms to serious bullying, harassment, and violence towards colleagues. For HR and compliance teams, one of the biggest challenges will come when an allegation is actually made and decisions have to be taken about how it should be handled. We’ll hear from financial services and discrimination expert Anne Sammon about that.

The level of concern among firms in the sector has been reflected in the business press. The Guardian reports that City firms have been racing to prepare for the FCA’s crackdown on bullying and harassment, and City AM leads on the increased level of scrutiny that non-banks are now facing.

For HR teams, the challenge now is putting those preparations into practice. An allegation may begin as an employment issue, but depending on its seriousness and the circumstances, it may also raise regulatory questions. That makes the way the case is handled from the outset increasingly important.

Investigations will need to be robust and decisions will need to be properly reasoned. Firms also need to think about the wider circumstances surrounding an allegation, including how inappropriate behaviour was allowed to develop and whether those responsible for managing the workplace responded appropriately. The FCA’s latest guidance makes clear that managers’ responsibilities depend on matters including what they knew, their authority and whether it was reasonable for them to take action. And there may be longer-term consequences. The FCA is specifically telling firms to consider how the new regime affects conduct breach reporting, fitness and propriety assessments and regulatory references.

So, when an allegation of potential non-financial misconduct arises, what should HR and compliance do differently from an ordinary workplace investigation? It’s a question I put to Anne Sammon: 

Anne Sammon: “So, I think first of all, it's let's assess the severity of the particular allegation. If we've got very serious allegations, the HR and compliance team should be discussing whether or not there is an early obligation to go and notify the regulator under what's called Principle 11, which is your duty as a regulated firm to be open and transparent with the regulator and tell them about things that they might need to know about. So I think that's one thing that is quite different - we need to think about whether or not we're engaging any of those principles. The other thing is about being quite strategic in terms of where might this situation end up, and how bad could this be for the individual involved? So historically, people might have thought that issues of non-financial misconduct might just end up with a final written warning, particularly if you've got somebody who's very important to the firm, somebody who's bringing in lots of money, there might be concern historically that that person might be treated more leniently than others. This focus on non-financial misconduct means that all of those cases have to be taken very seriously, but it's really important that the individual who is the subject of those allegations is also aware of how seriously this is going to be taken because they might choose to deploy a different strategy in terms of how open and transparent they are with you than they would if they thought that this was a more minor issue.”

Joe Glavina: “The FCA is flagging up the importance of ensuring decisions and the reasoning behind them are properly documented. What do you make of that?”

Anne Sammon: “So documentation is going to be really key because I think one of the things that we're likely to see is, because of the impact on an individual who's found guilty of non-financial misconduct in the workplace, they are more likely to litigate these matters than maybe they would have been before. So one of the things that will become relevant is the regulatory reference. So if you've got someone who is going into a role that is either certified, or a senior manager, there is an obligation on a firm to try and get a regulatory reference from their previous employers. If there's been an allegation of non-financial misconduct that's been found to have happened, that will have to be included on the regulatory reference and therefore that could mean that even people who aren't dismissed as a result of these issues might decide that they want to appeal the issue that they want to argue that it's discrimination, that it's whistleblowing, in order to try to get it overturned and removed from their file. So a paper trail becomes really important because I think we're bound to have more litigation from employees because of the severity of those consequences for them.”

Joe Glavina: “The FCA makes it clear that the regulatory risk doesn’t necessarily stop with the person who's been accused of misconduct. So what should managers understand about their own potential exposure if they know about inappropriate behaviour but fail to act on it?”

Anne Sammon: “So I think this ties in really nicely with the duty to take reasonable steps to prevent sexual harassment in that, in both cases, if you are not considering the environment that you are creating as a manager you may have liability, and that may be personal liability in terms of a claim being brought against you, but it may may also have those regulatory consequences. So, if we have a case of harassment or bullying, HR teams are going to have to look at the particular events, but also what led to that, what created the environment in which that was allowed to happen, and if a manager is found to have known that somebody was bullying, or harassing, or behaving inappropriately towards other team members, that is likely to be of concern in relation to that manager's conduct, and even the conduct of that manager's manager if it becomes known that that more senior individuals were aware of the potential of that behaviour.”

So, the key point is that the new regime raises the stakes when allegations of serious misconduct arise. Firms need robust processes in place and HR; compliance and managers need to understand the potential regulatory consequences. Anne is currently advising a number of financial services clients on how to handle these issues under the new rules. If you would like help with this, please do contact Anne – her details are there on the screen for you.