Will the FCA seize the opportunity to codify guidance on non-financial misconduct?

Social movements such as #MeToo and #BlackLivesMatter (click to listen to our podcasts on these) have placed a spotlight on non-financial misconduct in recent years.  The repercussions have been felt in many industries, including financial services.  In particular, the FCA been highlighting non-financial misconduct as an issue of regulatory interest since at least 2018, but has yet to release detailed guidance on the expectations of firms when faced with allegations of non-financial misconduct. In this article, we explore whether that guidance is within reach and if so, what it may look like.   

The FCA’s stance on non-financial misconduct

The FCA considers non-financial misconduct to be within the scope of its statutory objectives, by drawing a link between non-financial misconduct, culture and psychological safety:

• In a publicised letter to the Women and Equalities Committee, Megan Butler (at the time the FCA’s Executive Director of Supervision - Investment, Wholesale and Specialists Division) stated: "A culture where sexual harassment is tolerated is not one which would encourage people to speak up and be heard, or to challenge decisions.  Tolerance of this sort of misconduct would be a clear example of a driver of poor culture."

  The letter outlined three main bases upon which sexual misconduct falls within the scope of the FCA’s regulatory framework including through (i) supervision of workplace culture; (ii) fitness and propriety assessments; and (iii) potential enforcement of the Conduct Rules themselves.

• This message was reiterated in a speech by Christopher Woolard (at the time the Executive Director of Strategy and Competition) in December 2018, in which it was confirmed that "non-financial misconduct is misconduct, plain and simple."
• Subsequently, in a Dear CEO letter to wholesale general insurance firms in 2020, the FCA commented: "We view both lack of diversity and inclusion, and non-financial misconduct as obstacles to creating an environment in which it is safe to speak up, the best talent is retained, the best business choices are made, and the best risk decisions are taken” and "How a firm handles non-financial misconduct throughout the organisation, including discrimination, harassment, victimisation and bullying, is indicative of a firm’s culture."

In November 2020, Jonathan Davidson, Executive Director of Supervision (Retail and Authorisations) reiterated that: "Over the last few years, we’ve increased our focus on non-financial misconduct because a culture where non-financial misconduct is tolerated is not healthy, it’s not safe and it’s not acceptable."

Despite this, to date the FCA has refrained from releasing published guidance (beyond the quotes outlined above) to clarify how non-financial misconduct should be assessed and investigated by firms, when misconduct will impact fitness and propriety and/or amount to a breach of the Conduct Rules and when notifications should be made to the FCA.  To further add to this uncertainty, there are very few published examples from the FCA as to what constitutes non-financial misconduct, and those that are published relate to dishonest or extreme misconduct, meaning that firms often struggle to grapple with the regulators’ expectations in the context of more minor cases of non-financial misconduct, or cases where misconduct occurs outside of the workplace.

Relevant published examples

There are numerous published examples of the FCA prohibiting individuals on the basis of non-financial misconduct involving dishonesty or fraud including:

• David John Hobbs (13 December 2013) – prohibited for lying to and misleading the FCA and the Upper Tribunal;
• Anthony Verrier (27 January 2014) – prohibited following findings by the High Court of unlawful means conspiracy and departing from the truth in his evidence[7]; and
• Jonathan Paul Burrows (15 December 2014) – prohibited as he had deliberately failed to purchase a valid ticket for his train journey.

Cases involving dishonesty are less challenging for firms to assess given that the regulators have confirmed that a person who acts dishonestly is obviously also acting without integrity.  However, it does not follow that a lack of dishonesty automatically means there cannot be a lack of integrity.  Further, there are less published examples of non-financial misconduct in absence of dishonesty, and those published are extreme examples:

• Russell David Jameson, Mark Horsey, and Frank Cochran (3 November 2020) - prohibited following convictions for serious sexual offences, namely indecent images of children (Jameson), voyeurism (Horsey) and sexual assault and controlling/ coercive behaviour (Cochran). In reaching the decisions, the FCA placed particular emphasis on the fact there had been an outrageous abuse/ breach of trust and substantial planning in order to commit the offences.

Current state of play – lessons learned from the legal profession

One week after the decisions in Jameson, Horsey, and Cochran, the High Court issued its judgment in Ryan Beckwith v SRA ([2020] EWHC 3231 (Admin)), which concerned a partner at a large law firm who had inappropriately engaged in sexual activity with a junior colleague whilst she was heavily intoxicated and her judgement impaired (although there was no allegation of a lack of consent).  The Solicitors Disciplinary Tribunal’s (SDT) earlier decision had found that the partner did not abuse his position of seniority or authority, but nevertheless concluded that the conduct was in breach of the Solicitors Regulation Authority’s (SRA) Principles to act with integrity and in a way that maintains public trust in solicitors.

The High Court subsequently found that the obligation to act with integrity had to be "drawn from and informed by" appropriate construction of the contents of the SRA Handbook.  Three points of principle were drawn:

• In the context of the regulation of a profession, there is an association between the notion of having integrity and adherence to the ethical standards of the profession.
• On matters touching on professional standing, there is an expectation that professionals may be held to a higher standard than those that would apply to those outside the profession.

• A regulatory obligation to act with integrity "does not require professional people to be paragons of virtue".

The Court concluded that as the SDT had found that the partner had not abused his position of authority and seniority and had not, therefore, taken unfair advantage of the junior employee, the SDT’s finding that he had fallen below accepted standards was not coherent.  Whilst the partner’s conduct affected his own reputation, that did not mean that the conduct affected his own reputation as a provider of legal services or the reputation of his profession. 

This decision highlighted potential disparity in the approach taken by the two regulators in relation to non-financial misconduct, despite there being a common standard of integrity, and despite both fields fulfilling a similar role in society.  However, it appears that the decision in Beckwith was influential, with the FCA’s Upper Tribunal in a subsequent decision drawing on key aspects of the SRA’s approach and signalling that authorities from the legal profession are equally applicable in the financial services context.

The case in question involved a financial advisor who was prohibited by the FCA following his conviction for attempting to meet a 15-year-old child following sexual grooming.  The FCA had found that the individual’s exploitation of a minor, abuse of a position of trust and deliberate and criminal disregard for appropriate standards of behaviour meant that he lacked integrity, and his prohibition was required in order to maintain public confidence in financial services.  However, the decision was subsequently referred to the Upper Tribunal who:

• reconfirmed that in the context of fitness and propriety, a lack of integrity did not mean the same thing as dishonesty: somebody could lack integrity without being dishonest;
• ·observed that the duty of integrity does not require professional people to be paragons of virtue; professional integrity is linked to the manner in which that particular profession professes to serve the public and, in that regard, there needed to be a qualitative connection of the offence to the approved person’s role;
• ·noted it was not simply a question of assessing whether the behaviour concerned demonstrated a lack of integrity at large, but whether the behaviour engaged the specific standards laid down by the relevant regulator (consistent with the approach taken by the High Court in Beckwith).In this context, the key question was whether the conduct realistically engaged the question as to whether the individual posed a risk to consumers and to confidence in the financial system; and
• explained that integrity was not about whether the behaviour affected the person’s personal reputation, but also the reputation of the financial services industry and the trust that the public puts in those whom the FCA regulates.

The Upper Tribunal concluded that the offences were unrelated to the individual’s professional role, and the attempt to link a lack of integrity to his role was unconvincing in absence of compelling evidence such as from a criminological or psychological expert (particularly in circumstances where there was no evidence that the individual had lacked integrity in his dealings with clients).  Further, whilst the individual’s personal reputation had clearly been severely damaged (including several of his clients leaving following the conviction), the majority of his clients stayed with him despite the offences.  As such, the Tribunal was not satisfied that the offence affected his reputation as a financial adviser (Jon Frensham v The Financial Conduct Authority [2021] UKUT 0222 (TCC)).

It should be noted that in this case, the Upper Tribunal was not being asked to re-determine the earlier decision, but did comment that had it been asked to decide the case on the basis of the conviction alone, it would have asked the FCA to reconsider its decision to prohibit the individual on the grounds of a lack of integrity.  Notwithstanding this, there were other matters which the Upper Tribunal considered the FCA was entitled to rely upon in reaching a decision that the individual lacked integrity, namely the fact that the individual had failed to be open and cooperative with the FCA in relation to several matters.

Recent Guidance from the SRA – sexual misconduct

Following the decision in Beckwith, the SRA has taken the opportunity to codify its approach to sexual misconduct, by publishing last month detailed guidance to clarify (i) what amounts to unacceptable behaviour and when that might become a regulatory matter; (ii) the boundary between an individual's behaviour in their private and professional life, and where there may be an overlap; (iii) expectations of firms to promote a workplace culture that does not tolerate sexual misconduct; and (iv) firms obligations when investigating and reporting such behaviour.

In summary, the factors the SRA will consider when assessing whether sexual misconduct is a regulatory issue are:

• Proximity to practice. Except in cases where conduct is so serious that it offends public trust and confidence irrespective of context, it will generally be necessary to identify whether conduct is proximate enough to the professional practice, to call into question the integrity of the individual or wider trust in the profession. In this regard, relevant considerations include whether the conduct took place on practice premises, arose from legal practice context (including formal or informal work events in other locations), involved a colleague, client or professional acquaintance, stemmed from a professional origin (i.e. professional/ networking event), or took place after a firm event, or event linked to the profession at a separate location.
• Seriousness of the conduct. Gravity will be informed by all the circumstances of the case but in summary, the more evidence of a sexual motivation, the more serious the misconduct is. Matters considered to be aggravating factors include:
  • physical contact accompanied by a sexual element, where the type and place of touching, level of intimacy and duration will all be relevant;
  • behaviour involving violence, exploitation, threats, malice, coercion, pressure, manipulation, victimisation, harassment, discrimination, intimidation or bullying (examples include comments about an individual’s sex life, sexualised conduct accompanied by threats, suggesting or demanding that junior staff wear certain attire or intentionally plying someone with significant quantities of alcohol);
  • conduct that was repeated such that it was a pattern, including in circumstances where there were warnings to stop;
  • conduct directed at junior/ vulnerable colleagues or more than one individual;
  • awareness that the conduct was unwelcomed;
  • planned as opposed to spontaneous behaviour; and
  • comments that are overly sexual in nature, or involving gestures.
• Criminality of the conduct. If a criminal conviction is already recorded the SRA will rely on that finding when taking regulatory action.Even if a conviction is for an offence that appears limited to a person’s private life, that might still raise professional misconduct issues where the conviction is so serious that it’s relevant to professional standing. However, criminality is not a pre-requisite for the SRA making a finding of sexual misconduct and there may be instances where misconduct has not resulted in a criminal offence, but is nevertheless serious enough to necessitate regulatory action.
• Consent. It is recognised that assessing the issue of consent is very complex but relevant factors may include relative seniority, vulnerability, intimidation and intoxication.
• Vulnerability of the alleged victim. This can take many forms such as professional status (i.e. seniority) or relationship (e.g. where someone is unduly reliant on another), emotional, financial or career dependency, fragile health, disability, age, sexual orientation, intoxication, isolation or cultural vulnerability.
• Intoxication. This is never a defence but depending on the context and circumstances, it could aggravate or mitigate the behaviour.

Whilst this guidance is specific to sexual misconduct, there are many aspects of it that could be equally applicable to the assessment of other forms of non-financial misconduct (e.g. discrimination, harassment, victimisation and bullying).  Those include the proximity, vulnerability and intoxication limbs, in addition to elements of the gravity assessment (including duration, a pattern of behaviour, premeditation, abuse of power and warnings).

In terms of the SRA’s expectations of firms, those include to:

• foster a culture of zero tolerance of sexual misconduct, where staff feel that they can speak up freely and report matters to their firm and to the SRA;
• investigate allegations of sexual misconduct sensitively, and appropriately in compliance with their legal and regulatory obligations;
• have in place robust procedures and policies to properly manage and investigate complaints of sexual misconduct when they are made; and
• report matters promptly to the SRA which are capable of amounting to a serious breach of the SRA rules.

An opportunity for the FCA to codify its approach to non-financial misconduct?

Now that the SRA has taken the plunge to codify its approach to sexual misconduct, it remains to be seen whether the FCA will follow suit by providing detailed guidance on sexual misconduct, or indeed non-financial misconduct more widely.

It seems that the FCA has an opportune moment in that regard.  In a joint discussion paper from the FCA, PRA and Bank of England concerning diversity and inclusion improvements in financial services (DP21/2), there was a suggestion that the regulators might seek to embed non-financial misconduct into fitness and propriety assessments to support an inclusive culture.  In this regard, the regulators:

• recognised that firms may find it helpful to have guidance as to what constitutes non-financial misconduct. The regulators suggested that this guidance could include evidence of sexual harassment, bullying and discrimination on the basis of someone's protected (or other) characteristics; and
• suggested it could also be helpful for guidance to be developed on how such behaviour, or failure to take reasonable steps to address these kinds of behaviour, could result in a breach of the conduct rules. 

The regulators originally indicated that the discussion paper would be followed by a Policy Statement in Q3 2022.  We now understand that a consultation paper is on the horizon, with a Policy Statement expected for 2023.  This might include long awaited guidance on non-financial misconduct. 

Even if the opportunity is taken to provide guidance, it remains to be seen how detailed that would be.  The FCA has historically steered away from providing detailed guidance on conduct assessments, on the basis that it views conduct as something which needs to be assessed in the context of a specific firm’s culture and risk appetite.  However, the FCA authorities referred to above appear to suggest the regulator is aiming for a more consistent approach, not just within financial services but also alignment to the legal profession.  In that regard, the FCA has the opportunity to mirror (in total or in part), the SRA guidance (whether that be just in the context of sexual misconduct, or adopting the elements that are equally applicable to non-financial misconduct more widely).  It may be that the FCA approach is not codified in guidance, but that it continues to rely on soundings from the SRA (whether that be the guidance or authorities) on a case by case basis, thereby retaining a level of discretion.

There is of course potential that any future guidance (or soundings from the SRA) will result in the factors relevant to conduct assessments becoming more aligned with those relevant to findings of gross misconduct for the purposes of disciplinary and dismissal proceedings. This in turn may lead to more of a convergence of the regulatory and employment considerations when dealing with any instance of potential non-financial misconduct. However, the analysis in relation to each is likely to remain distinct.    

What should firms do in the meantime?

In the absence of detailed guidance from the FCA in this space, firms continue to grapple with allegations of non-financial misconduct.  The sector would benefit from consistency in the application of the rules, which such guidance would in part be a useful tool in delivering.

In the meantime, the SRA guidance is helpful, and can be used by firms when assessing cases, to help formulate thoughts on non-financial misconduct more generally.  Whilst the SRA guidance is specific to sexual misconduct, as explained above, there are aspects which are equally applicable to other forms of non-financial misconduct.

Adopting such an approach would be consistent with the soundings from the FCA Upper Tribunal, that authorities from the solicitors’ field are equally applicable in the financial services context.  

We will be closely following developments in this area and providing further thought leadership in due course.  As explained, further guidance would however be welcomed and we look forward to seeing what comes next.

If you want to discuss any of the issues raised in this article please do get in touch with one of our experts in this area, whose contact details are below.