Out-Law News

Regulatory references ‘in scope’ of FCA’s survey of non-financial misconduct

Anne Sammon tells HRNews about the challenge facing firms over whether non-financial misconduct should be included in a regulatory reference

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  • Transcript

    As we reported on Tuesday, the FCA has launched a survey into non-financial misconduct in the financial services sector. On 6 February, the regulator wrote to Lloyd’s and London Market Intermediaries and Managing General Agents requesting a raft of information relating to incidents of non-financial misconduct which have taken place. The deadline for responding has now passed – it was close of business on Tuesday 5 March. 

    The survey follows consultations last year by the FCA and PRA on diversity and inclusion in financial services which proposed the introduction of strict new rules and guidance designed to force a culture change across the sector and give the regulator greater visibility of how firms are tackling the issue. The FCA’s survey will no doubt play a significant role in shaping the new rules and guidance which the regulator has said they will publish in due course. 

    As we highlighted on Tuesday, the FCA made it clear in their letter of 6 February that they wanted firms to break-down how the incidents of non-financial misconduct relate to senior and non-senior management roles. That suggests they have in mind tying this type of misconduct to the ‘fit and proper’ person test for senior roles and is consistent with what the FCA was saying last year at the consultation stage. Then, chief executive Nikhil Rathi said: “We have taken a lead among regulators in taking a clear stance that non-financial misconduct, such as sexual harassment, is misconduct for regulatory purposes. We’re strengthening our expectations on how the firms we regulate consider such misconduct when deciding whether someone is fit and proper to work within the industry.” 

    Notably, the FCA’s notification letter specifically mentions that the survey includes ‘high level questions on regulatory references.’ So, it does seem pretty clear that information firms hold about an employee, or former employee, relating to behaviour such as bullying or harassment should in some circumstances be included in a regulatory reference. However, the challenge for firms will be in determining whether an issue is serious enough to be included in a reference, bearing in mind the potential serious consequences for the individual which could be career ending.

    So, let’s consider that point. Earlier Anne Sammon joined me by video-link and I asked her how firms should tackle this:  

    Anne Sammon: “So, I think this is an area where you would definitely want legal advice in terms of whether your particular situation is something that is serious or not serious. As a general rule, my view is that anything that potentially involves criminal allegations is in that serious bucket and therefore definitely needs to be included on a regulatory reference. That doesn't necessarily mean that there has to have been a decision that there has been criminal activity, it’s just if the actions that we are concerned about could potentially be criminal then I think that's where we definitely cross the line into it needing to be included on a regulatory reference, but there are so many different factors at play that that's why it's so important to take advice on a kind of case-by-case basis. The challenge for firms with this potential new guidance around non-financial misconduct is that it covers bullying and harassment, and when we're talking about harassment, we're not just talking about harassment under the Equality Act, we're talking about any type of harassment. So, employers could find themselves in quite difficult positions having to make difficult calls on whether they put in a regulatory reference that an employee was found guilty of harassing another colleague, knowing that if they include that type of information that could well be the end of that person's career in the sector.”

    Joe Glavina: “The FCA says it will provide some additional guidance at a later date setting out when misconduct is, and is not, within the scope of its conduct policy. So, taking account things like whether the conduct occurs on the firm’s premises, whether it’s connected with the firm’s business or, perhaps, involves the firm’s clients, and so on. Do firms need to wait for that guidance before reviewing their own policies?

    Anne Sammon: “So I suppose the good thing for employment lawyers is that a lot of the questions that the FCA is using as kind of their test of whether this was on the firm's business or not, are the tests that we're used to looking at from a vicarious liability perspective. So I would hope that lots of firms already have policies that sort of cover off these issues, but I think it's worth revisiting this. So, what do your policies on diversity, equality and inclusion say around harassment? Are your examples all focused on what happens in the workplace or have you gone slightly wider? So that people are very clear that if something happens, for example, at a work event that that is covered by the harassment policy. Are they clear that the way that they behave outside of work is also potentially relevant? This is where the importance of training comes in as well. We quite often deliver training to clients around what do we mean when we're talking about concepts like fitness and propriety? Where does the behaviour outside of work fit into that assessment? Quite often, when people are sitting in those session they are surprised by the extent of the regulators’ remit to look into their private lives.”

    Joe Glavina: “Treating this type of non-financial conduct as part of the ‘fit and proper person’ test could impact on an individual’s career, potentially ending their career in this sector. Do you think managers are sufficiently aware of that?” 

    Anne Sammon: “I would hope so because for any of our organisations that have staff who are senior managers and certified, they should already be making sure that those individuals understand what's meant by fitness and propriety and fitness and propriety for a long time has covered behaviour outside of the workplace. So, we had that case back in 2014 about the BlackRock trader who was found guilty of fare evasion and that had an impact in that he was found not to be fit and proper, barred from working in the financial services sector in a regulated position. So for a long-time firms have known that that behaviour outside of work is definitely relevant to fitness and propriety. The piece that this sort of brings into play is kind of making a wider group of people aware of that, not least because we will sometimes see situations where someone is moving into a role where fitness and propriety becomes an issue and their behaviour prior to that point is also under scrutiny. So, if you're promoted into a certified position and you're suddenly subject to that test of fitness and propriety, you're not looking at your behaviour from the point of view of promotion, you're looking at your behaviour throughout your career, and that's particularly challenging for younger employees where a lot of their behaviour is scrutinised on social media.”

    The deadline for responding to the FCA’s survey has now passed – that was close of business on 5 March. On Tuesday, Chris Evans talked to this programme about the survey and what it means for firms affected by it. That’s ‘FCA launches non-financial misconduct survey for Lloyd's and London market firms’ and we have included a link to that programme in the transcript of this programme for you. 

    - Link to HRNews programme: ‘FCA launches non-financial misconduct survey for Lloyd's and London market firms’
    - Link to FCA’s letter requesting information relating to non-financial misconduct

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