Financial services employers can find themselves facing difficult decisions when it comes to acting on employee misconduct due to the complex interaction between employment law and PRA/FCA regulatory obligations. That is particularly the case when it comes to non-financial misconduct which has been a particular focus for the FCA in recent years.
What is non-financial misconduct?
There is no legal or formal definition of non-financial misconduct and no specific examples contained in the FCA Handbook.
This means that in practice, such misconduct could encapsulate a wide range of employee behaviour or actions. It could include for example, discrimination, bullying, sexual harassment, or criminal behaviour.
Non-financial misconduct can also include acts that do not occur in the workplace but are still capable of affecting the individual’s ability to perform their regulated role.
Ultimately, such misconduct may potentially breach the FCA Conduct Rules and/or lead to a finding by the employer that the individual is not fit and proper for the purposes of the FIT test required by the FCA Handbook. It may also result in an adverse finding by the FCA as to the individual’s and/or the firm’s fitness and propriety.
When is the FCA regulatory regime engaged?
The main purpose of the FCA’s Conduct Rules is to set a standard of behaviour that is expected of almost all employees (excluding ancillary staff) at regulated firms, with a view to reinforcing the importance of a positive working culture and effective risk management.
The financial misconduct of regulated individuals is clearly relevant in the context of carrying out their role. However, it is also clear that non-financial misconduct both in and outside the workplace may fall within scope of the Conduct Rules.
For example, sexual harassment would be a serious misconduct issue under an employer’s anti-harassment and disciplinary polices, but it may also call into question the individual’s integrity. Subject to the outcome of an investigation into all relevant circumstances, it could therefore result in the employer finding a breach of Conduct Rule 1 (duty to act with integrity).
Non-financial misconduct is also relevant to assessing the fitness and propriety of staff. Several FCA enforcement cases to date have focused on that particular issue.
As such, a key consideration for employers investigating non-financial misconduct is the potential outcome of a negative FIT assessment which would have significant consequences for an employee’s future career in financial services.
The implications for senior managers can also extend beyond their own conduct. A failure by a senior manager to take reasonable steps to address the non-financial misconduct of a team member could call into question their supervisory and leadership abilities and result in an employer questioning whether they are fit and proper to carry out their role.
In the absence of guidance from the FCA however, it is far from straightforward for employers to decide the point at which employee misconduct tips over from being solely an employee relations matter to be dealt with through HR procedures, or whether the regulatory regime and requirement to disclose to the FCA is also engaged.
FCA enforcement action
In November 2022, the FCA issued a Final Notice against Ashkan Zahedian prohibiting him from carrying out any function relating to a regulated activity as a result of a conviction for violent criminal offences outside of the workplace which led to a three-year prison sentence.
This decision was reached because the FCA considered that Mr Zahedian’s convictions demonstrated a serious lack of integrity and that allowing him to continue in his role would undermine public confidence in the financial services industry.
The FCA focused on the nature of Mr Zahedian’s offences rather than whether it was related to the work he carried out as part of his role. It reinforces that an individual’s conduct in their private life can have a direct impact on their fitness and propriety as part of their professional life.
The Zahedian decision can however be contrasted with the earlier guidance provided by the Upper Tribunal in relation to the March 2021 FCA prohibition decision relating to Jon Frensham, following his conviction for the sexual offence of grooming.
The FCA had initially relied on his criminal conviction and breach of bail conditions to argue his behaviour was incompatible with his regulated role as an independent adviser, despite there being no connection with the workplace.
The Upper Tribunal held that the FCA needed to point to a lack of integrity linked to the way in which the profession serves the public, rather than just public outcry at the behaviour itself. The prohibition notice remained valid due to Mr Frensham’s disregard for bail conditions, lack of transparency and delay in updating the FCA about his arrests, rather than his criminal convictions.
The balancing exercise for employers
It is difficult for firms to draw definitive conclusions from the FCA enforcement action to date. A key consideration remains whether the misconduct in question affects the ability of the employee to perform their regulated role, taking into account the requirements of the FCA Handbook.
A serious criminal offence, or misconduct involving power imbalance, or abusive conduct to colleagues may more obviously impact an individual’s fitness and propriety. Lesser misconduct such as breach of an employer’s internal rules and policies or a provision of their employment contract may be less straightforward.
Misconduct allegations can often be nuanced or involve one person’s word against another, with little supporting written evidence. It may not then be immediately clear how best to proceed, and whether it is possible to consider the situation as a standalone employee relations issue in accordance with internal disciplinary procedures.
Regulatory and employment law issues are not mutually exclusive, but they are distinct and should be treated as such.
- Be careful not to assume that breach of an internal policy will always be a breach of a Conduct Rule leading to a negative FIT assessment without full investigation and input from all relevant parties, such as compliance and legal teams. There may be an understandable tendency to prioritise the relationship with the regulator when it comes to addressing non-financial misconduct, but the potentially significant consequences of an adverse FIT finding should also be kept front of mind to ensure that employees are treated fairly.
- Seek legal guidance at an early stage on the appropriate steps for addressing the particular misconduct.
- Ensure there is a coordinated approach between HR and compliance teams and that it is clear (both internally and to the employee) whether the disciplinary process will deal with employment concerns only, and/or the Conduct Rules. This may be easier said than done.
While the HR team will understand the best outcome from an employee relations perspective (which may not always involve a serious disciplinary sanction), the compliance team will be driven by the need to remain compliant and transparent with the FCA. Firms must remain clear on their approach to avoid confusing employees on the remit and potential consequences of the process that the firm is adopting.
The FCA’s regulatory reference regime requires employers to provide an employment reference for an ex-employee to their prospective employers. It must disclose any finding on breaches of the Conduct Rules, any adverse finding as to the FIT test, details of any disciplinary action taken as a result, and more generally all information that is relevant to the prospective employer’s fitness and propriety. The references generally cover a look-back period of six years.
It is important for employers to be confident in the accuracy of the information they include in a regulatory reference. A negative reference may well prevent an employee from securing a regulated role in the future and the resulting loss of future earnings could give rise to a negligent misstatement claim against the previous employer.
This is in addition to the risk of general employment law claims, such as unfair dismissal and whistleblowing. Therefore, employers should ensure they have all relevant information, have sought appropriate advice, and considered the regulatory aspects properly before making any misconduct-related findings.
Further clarity from the FCA over its expectations around non-financial misconduct would be welcome, and would allow employers to better manage the tricky overlap of employment and regulatory aspects. In the meantime, employers should try to address the issues distinctly and thoroughly, following a detailed investigation, to ensure that they reach a well-considered outcome to disciplinary proceedings.
Following publication of a discussion paper in July 2021 in relation to diversity and inclusion, the FCA is expected to publish a final Policy Statement at some point this year. It remains to be seen whether the FCA will take the opportunity to provide additional guidance to employers on the regulatory approach to non-financial misconduct.
In part two of this two part series, we will offer practical guidance on conducting fair and effective investigations and disciplinary proceedings involving non-financial misconduct.