In September, the Financial Conduct Authority (“FCA”) published its consultation paper, “Diversity and Inclusion in the financial sector – working together to drive change.” The main tenet of which is to establish a Diversity and Inclusion (“D&I”) framework for minimum D&I standards.
Sticking to their commitment that regulation needs to be proportionate, the FCA’s proposed D&I requirements are not as burdensome as might have been expected as smaller firms with fewer than 251 employees would be exempt from many of the requirements. The additional requirements that will apply to larger firms include establishing, implementing and maintaining a D&I strategy, setting appropriate diversity targets and D&I data reporting & disclosure.
However, looking beyond the title of the paper and the lofty goals of the D&I framework, of much greater potential short-term impact in the asset management space is the elucidation of the FCA’s direction of travel on financial misconduct.
Whilst the FCA has referenced over the years that non-financial misconduct can amount to a breach of the Conduct Rules and is relevant to assessing whether an individual is “fit and proper”, this is the first time that the concept of non-financial misconduct will be incorporated into the FCA handbook.
For many years, the FCA has received scrutiny regarding its track record on non-financial misconduct and this further intensified over the summer, when being challenged on its supervision of Odey Asset Management and its founder in relation to alleged sexual misconduct. In response, it is now proposed to explicitly include rules and guidance on non-financial misconduct within the FCA’s Code of Conduct, Fit and Proper test, Threshold Conditions and the senior management arrangements rules.
Conduct Rules
Currently, the scope of the conduct rules is restricted to conduct in connection with regulated activities and certain other kinds of misconduct that could otherwise have serious effects. The FCA propose to expand the scope of those rules to make clear that they cover serious instances of bullying, harassment and similar behaviour towards colleagues.
The FCA has proposed examples on the types of behavior that would fall within the expanded scope of misconduct such that they breach the FCA’s conduct rules. These examples include intimidating or violent conduct, abusing or misusing power and offensive / malicious or insulting conduct. The behavior in question would need to have a nexus with the individual’s employment / regulated activities. Breaches of conduct rules need to be notified to the FCA, in some cases, immediately.
Fitness and Propriety
The FCA also provides clarification on its thinking on how non-financial misconduct forms part of the fit and proper assessment for Senior Managers and Certification Staff. Currently misconduct both within and outside the workplace can be relevant to such an assessment. So, whilst the proposals do not change the scope in this respect, the FCA are now clarifying that bullying and similar misconduct within the workplace is relevant to a fitness and propriety assessment and similarly serious behaviour in a person’s personal or private life may also be relevant. For example, misconduct in someone’s personal life may result in a significant risk the person would commit misconduct in their work activities, or misconduct outside the regulated sphere may be an indicator that they do not currently meet the standards of the regulator to be considered fit and proper.
The FCA also proposes that firms include information in regulatory references about disciplinary action taken for non-financial misconduct in relation to other members of the Firm’s workforce. Furthermore, misconduct in relation to someone outside of the work context may also need to be disclosed where it is deemed to be relevant to their fitness and propriety.
What action to take now?
Whilst still only proposals, the direction of travel is clear and the FCA expects implementation to be within 12 months, so Q3/4 2024 is the timeframe we are working with.
Immediate significant action is therefore probably a little premature but some sensible basic first steps to take now include:
- flagging the FCA’s paper to your HR team – these are complex and sensitive issues extending beyond the sole purview of the Compliance group;
- completing thorough background checks on all staff (both at hire and periodically thereafter) (see our previous note on Rolling Bad Apples);
- making sure regulatory references are received for all new hires;
- ensuring all staff have returned attestations to self-certify their own on-going fitness; and
- having a discussion on conduct and culture in year-end compliance training will help to alert in a timely way wider team members.
Conclusion
Whilst the D&I requirements are not as burdensome as might have been expected for smaller firms, the FCA has confirmed that it will form an important element of their supervisory approach going forward.
The long-awaited guidance from the FCA in relation to non-financial misconduct is no doubt a step forward in providing more clarity for firms regarding conduct that is required to be notified to the FCA, as well as confirming information that will need to be included within the content of regulatory references, which regulated firms have grappled with for several years.
It is an emerging and complex area, so it will be interesting to see whether the FCA becomes better able to establish the link between individuals’ non-financial misconduct and the relevant regulatory objectives.
