In our non-financial misconduct part one article we discussed the types of behaviour that could potentially breach the FCA’s Conduct Rules or lead to a finding by the employer that an employee is not fit and proper for the purposes of the FIT test set out in the FCA Handbook.
In this second part, we provide best practice for the investigation and disciplinary processes in relation to such misconduct.
Employers need to tread carefully when handling such processes to ensure an accurate and appropriate outcome which balances the employer’s regulatory and employment law risks with the potential for a long-term detrimental impact on the employee’s career.
Investigation process
There are no specific rules or guidance from the FCA as to how firms should conduct internal investigations. However, it should go without saying that a fair, balanced and evidentially sound process should be followed. Broadly, this will involve the following key steps:
- Mapping out the scope of the investigation and the terms of reference for the investigator.
- Deciding who is the most appropriate senior manager to conduct the investigation.
- Involving appropriate teams at an early stage. This might include colleagues from risk, compliance, HR, and legal, as well as support from external counsel as required.
- Taking necessary steps to preserve relevant evidence, which may include forensic IT support. Data protection, privacy and confidentiality issues should also be considered and assessed at an early stage.
- Gathering information to decide on the key employees to interview.
- Notifying concerns to relevant employees and carrying out investigatory interviews.
- Preparing a detailed investigation report which facilitates recommendations in relation to any follow-up disciplinary action.
- Providing clarity over whether any proposed disciplinary action will deal with employment issues only and/or potential breaches of the Conduct Rules.
- Complying with FCA notification requirements promptly.
By working through each of these steps in a considered manner, employers can limit the risk of criticism from both the FCA and employees (or their representatives) over whether the matter was properly and fully investigated.
It is key that employers do not rush to judgement in relation to non-financial misconduct, despite concerns about reputation and their ongoing relationship with the regulator. The repercussions of getting things wrong at an early stage can have far-reaching and costly consequences.
Disciplinary process
If an investigation demonstrates clear grounds for starting a disciplinary process, employers should note the following key points.
- The disciplinary process should be conducted to the highest procedural standards on account of the potentially serious consequences for regulated individuals, both in relation to their existing role but also their future career in financial services.
- In practice, this involves full compliance with the employer’s own procedures, the principles of fairness set out in the ACAS Code of Practice on Disciplinary and Grievance Procedures, and the case law on fairness in disciplinary proceedings.
- Getting the process wrong, or reaching an inaccurate finding which is not supported by objective evidence, could lead to costly litigation on various grounds, such as breach of contract, unfair dismissal, whistleblowing, discrimination and negligent misstatement (in the case of a regulatory reference).
- Employment tribunals and courts will scrutinise the process to establish whether the employer arrived at its decisions carefully, to ensure a fair and rational decision-making process based on properly tested evidence.
Disciplinary hearing
Although there is no statutory right for an employee to have legal representation at internal disciplinary meetings, employers may consider if it should be permitted in exceptional circumstances (such as where there is a concurrent criminal investigation or charges).
Prior to the hearing, employees should be provided with a full description of the disciplinary allegations (including any potential Conduct Rule breaches), the supporting evidence, and the consequences of a negative disciplinary decision. For example, in the case of serious non-financial misconduct, an employer may conclude that the employee is no longer fit and proper to perform their role and dismissal may ensue.
The choice of senior manager to conduct the disciplinary process can impact on the overall fairness of the process. They should be appropriately skilled and experienced, with a good grasp of the employer’s policies and the requirements of the Senior Managers and Certification Regime. They also need the authority to make significant judgement calls over when to adjourn to get further information or address queries, and the most appropriate disciplinary sanction to apply.
If an employee exercises their right to appeal a disciplinary decision, ideally a senior manager with no previous involvement in the investigation or disciplinary stages should be involved so as not to call into question their impartiality.
Takeaways from case law
The case of Jones v JP Morgan Securities Plc [2021] emphasises the need for employers to exercise sound judgement as to whether an employee has breached their regulatory obligations, rather than reaching a decision that is aimed at keeping the regulator on side.
In that case, Mr Jones was dismissed for gross misconduct by JP Morgan in January 2020 following a decision to revisit his trading activity from 2016 due to alleged “spoofing”. Spoofing occurs when a trader places a bid or offer but with the intent to cancel it before execution, to create a misleading impression about the demand or supply of a particular commodity or asset.
The Employment Tribunal held that there had been no reasonable investigation, considering the bank’s size and administrative resources, and that JP Morgan did not have a genuine belief in Mr Jones’ misconduct at the time of his dismissal. He was dismissed because the bank felt it had to “appease regulators” by making “heads…roll, whether or not they were the right heads”.
The Tribunal ordered that Mr Jones be re-engaged in a new role with the bank, among other things because it would be difficult to get work elsewhere given the bank’s indication that it would provide an adverse regulatory reference. The arrears of pay award was £1,588,489. JP Morgan eventually settled with Mr Jones.
The case underlines the need for employers to exercise sound judgement as to whether an employee has breached their regulatory obligations, following a robust investigation and fair disciplinary process, rather than reaching a decision that is aimed at appeasing the regulator.
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