HR briefing - misconduct and financial services

28 February 2024

In this month’s edition, senior knowledge lawyer, Matthew Ramsey, talks to senior associate, Laura Bridgewater, from our litigation and dispute resolution team about the FCA’s continuing focus on non-financial misconduct, a focus that is increasingly shared by regulators across industry sectors.


Matthew: Welcome to the Macfarlanes HR Podcast. I am Matthew Ramsey, I am the Senior Knowledge Lawyer in the Employment Team and I am joined this month by a colleague from our litigation and dispute resolution practice, Laura Bridgewater. Laura’s practice spans, as you might imagine the whole of litigation with a particular focus on investigations and on financial services in particular and Laura I think I am remembering correctly that you have actually been on secondment to the FCA?

Laura: Hi Matthew yes that’s right I was on secondment to the FCA back in 2016 which was a very interesting experience to be on the other side for once and one that I think, you know has been very useful in my career since then.  

Matthew: And its particularly useful for today because we are talking about the FCA and their approach to enforcement of what they now call non-financial misconduct or NFM for short. Let’s just set the scene a little bit, what is non-financial misconduct and why does it matter.

Laura: Thanks Matthew. NFM as its referred to is all about what employees and individuals who are authorised by the FCA either as senior managers or certified persons do sort of either outside of the office in their personal lives or inside the work place but outside of their sort of formal role so the way, you know for example how they interact with others and it includes bullying, harassment, discrimination and this topic is all about what might be referred to I guess is the expanding perimeter of a regulation into areas that wouldn’t historically perhaps be regarded as matters for the FCA or indeed the PRA to be concerned with and this all stems from the “me too” movement and in the film industry and generally heightening social expectations around conduct and particularly diversity and inclusion. So I think that is the context but it is fair to say that this isn’t new in the sense of there has been some quite big developments which I am sure we will talk about in recent months but this is something that the FCA has been talking about for a number of years.

Matthew: It is bad isn’t it that the FCA isn’t unique amongst regulators in focussing on misconduct generally so we have seen the SRA for lawyers as listed taking in much more active intervention stance and so that is presumably why it is relevant although we are talking targeting in this podcast that financial services its of general relevance for the clients across all sectors because where the FCA leads other regulators will no doubt follow. I absolutely agree and the SRA body of case law was very interesting actually because it is that case law that has somewhat lead the upper tribunals approach when challenging the FCA on some of this but initial enforcement actions are like non-financial misconduct and I think it is interesting to draw analogies between the approach to the FCA is now taking and the approach that other regulators have taken to date so I think specifically the SRA in its body of case law has drawn a distinction between someone’s personal integrity and their professional integrity so when its assessed cases its looked at whether an issue with respect to their personal integrity could be said to touch on their ability to perform their role in the work place and there was a decision called Frensham in 2021 where the upper tribunal looked at an individual’s attempt to challenge the FCA’s decision to prohibit him from working in financial services on the back of some criminal convictions for sexual harassment that involved children and the tribunal’s approach there was to sort of uphold the body of thinking from the SRA cases that actually yes this is clearly very serious conduct but the FCA hadn’t sort of drawn enough of a link between his misconduct outside of the office and his professional role. Having said that the tribunal did uphold the FCA’s decision on the basis that there were other sort of aggravated factors so the fact that Frensham hadn’t been open and cooperative with the FCA and also the fact that he breached his bail conditions so ultimately the FCA was right to prohibit him from working in financial services albeit that they hadn’t drawn this sort of close enough link and according to the upper tribunal’s decision. Fast forward to now and this is probably a neat segway onto to where the FCA has now got to with NFM because it is has just published a consultation paper in the Autumn of last year about its proposals to better integrate NFM considerations into regulation and one of the key things coming out of that consultation paper is the FCA very clearly saying what someone does in their personal life is relevant to the integrity when we look at whether they are fit and proper to perform a regulated function.

Matthew: And you can see that very obviously in some things. So if somebody is convicted of theft for instance and they have charge of client monies you can see that that outside work clearly has a relevance that inside work fitness and proprietary.  It is much more difficult as a sort of a lay outsider to see a link between you know being a little bit over friendly in the pub to somebody you are attracted to and necessarily reading that into being barred from your chosen career for eternity.  How does the FCA get comfortable with this relationship?

Laura: A very very tricky area and one that I think is going to be very difficult for firms to operate and practice. The FCA is very keen in its consultation paper to point out that this only applies to serious misconduct.

Matthew: What does serious mean?

Laura: Well that’s the question isn’t it and there isn’t a definition of what constitutes serious misconduct, it does seem to be something that will all need to be considered on a case by case basis and as you say there is clearly a spectrum. Criminal convictions are clearly going to be serious misconduct but then there is the scenario that you have just given Matthew at potentially the other end of the spectrum and quite how firms make decisions on that I think is going to be very challenging.  Now what the FCA is proposing to do in its consultation paper is, in respect of all firms authorised by the FCA there is going to be a proposed change to the sort of fitness and propriety assessment that a firm conducts when it considers whether or not someone is fit to be a certified person and/or to hold a senior management function and that is going to be amended so it has a specific reference to non-financial misconduct and considering the person’s integrity, there is also to be changes to the FCA conduct rules which are the rules that apply to certified persons and senior managers and also when looking at the firm level to when a firm assesses whether or not a firm is fit to be authorised looking at their suitability, is what we call the suitability professional condition whether or not the firm has in place suitable D&I type policies and looking at it from that angle a sort of systems and controls perspective so the FCA has got some quite specific changes that it wants to bring in to kind of bring NFM more squarely into the regulatory framework but I don’t think it’s going to answer any of these tricky questions about in practice how the firm’s apply any of this.

Matthew: And the onus really is on the firm isn’t it because it used to be the case many years ago that it was the FCA who had to undergo that approval process and now it has really delegated that to each individual firm so it falls to compliance and HR functions and line managers to make that initial assessment of whether somebody’s fitness and propriety is fallen into question by whatever they happen to have done or alleged outside work.

Laura: Absolutely there is a number of layers to this, I think there is the initial assessment of fitness and propriety so have the firms properly considered you know an individual’s background and should they have picked up on something sooner, then there is the OK an incident happened, does the firm get alerted to that, whether it’s something that has occurred in the workplace or in a work social setting or indeed in this person’s personal life, how does that information actually get escalated to the firm, because if they are not aware of information, they can’t do anything about it and then the third point is when that information if it does get escalated how does the firm then deal with that, you know what processes internally does it invoke and how does it make an assessment.

Matthew: And that brings us neatly on to the notice to provide information that the FCA published at the beginning of this month to some elements of the financial services industry requiring firms to give the FCA exactly that kind of data. What do they ask for?

Laura: So very recently, just earlier this month, the FCA wrote to UK insurers asking them to provide information about incidents of NFM that they have been alerted to and this includes information about the volume and types of NFM incidents, query what is meant by type there, there is not much detail given, methods of detection, actions taken to address the incidences and the FCA has asked for a breakdown between senior management function and non-senior management function incidences and it’s been confirmed that while the first letter has just gone out to UK insurers, there is going to be a follow-on letter sent out to wholesale bank. This is potentially going to be quite a bit undertaking for firms to respond to this survey. The FCA actually notes in his letters that some HR departments will need to conduct manual reviews if they don’t actually hold this data in an accessible format or the right format or broken down by the right categories such that they can just press a button and you know have the information at their fingertips.  

Matthew: It raises interesting data protections questions doesn’t it for compliance and HR functions, you know what data do they maintain, can we anonymise it, if they anonymise it completely how does that enable to track serial offenders adequately.

Laura: The FCA is alive to that issue and has stated in its letter that it doesn’t want to receive personal data and that you know it doesn’t want specific details of cases, it wants the hight level statistics but I think it’s one thing saying that and it’s another thing collating that information and of course conducting a verification exercise to make sure that the data that has been collected sort of accurately reflects the underlying fact but that the underlying facts have been stripped out. There might of course be some cases which are cross potentially cross the line into NFM there might be for example, a whistleblowing complaint about an employee which have some aspects which touched on you know potentially bullying claims but among lots of others and query how much credence and reliance is placed on certain allegations that might be made by a whistleblower that’s not something though that the FCA expects for them to take into account but I think there is a whole host of complicated questions that firms are going to have to grapple with to get this data.

Matthew: You know it is very hard to think of good reasons for the FCA not to be aggressive in their regulatory function, clearly we don’t want to have sexism and racism and transphobia endemic across any sector let alone financial services which is where all our pensions get managed and so on. But it’s one thing to say that and another thing either to get a genuinely fair financial services space or really to know quite how best to grapple with these sort of ingrain problems and I suppose it must be open to question whether these regulatory steps are actually making a difference on the ground for women, from people from different backgrounds.

Laura: I think it’s a very difficult position for the FCA and it has been criticised and its received feedback from firms that it has gone too far in its current proposals, I should say there are some additional proposal which will apply only to large firms which have more than 250 employees and that requires the provision of data to the FCA on an annual basis for them to have some specific D&I policies in place and targets and some people are saying all of this goes a little bit too far but then as you say clearly it’s the FCA that has to lead by example and lead the charge in the financial services sector and when you look for example at the recent allegations against Crispin Odey for example, I think that these sorts of issues are only being more and more in the public domain, you can’t escape in, so I think the politic and social pressure on the FCA is very intense.

Matthew: From an employment perspective we have definitely seen firms in this space, in fact firms across all sectors, radically changing their historic approach to allegations of sexual misconduct particularly in the past, I don’t think it will come as a shock to anyone to hear that you know 20/30 years ago it was very common to quietly get rid of the complaints, normally a junior female and to protect the high earning senior male despite whatever allegations had been made against them and that very much has changed, I think all firms across all the sectors are recognising that you can longer sweep these things under the carpet and take disciplinary action where that is warranted.

Laura: I think there is a real PR risk to firms if they don’t do that, what we might see is an increased number of employment tribunal claims for example brought by senior managers for lack of being treated unfairly, so we might see a rise in those sorts of complaints but ultimately I think from a firm perspective it’s about balancing the regulatory risk against employment risks and more often than not it’s going to be the regulatory risk that prevail. If firms don’t take on board the clear guidance the FCA has issued to date and indeed implement the new rules once they come into force and there is a risk that firms could be exposed to potential systems and controls enforcement action from the FCA so this isn’t just about the FCA’s powers to bring enforcement action against the relevant individuals, it’s about firms also having adequate systems and controls to police this. We for example saw the FCA open an investigation into Odey Asset Management Management off the back of the Crispin Odey allegations it has subsequently confirmed that that investigation has been closed but it nevertheless highlights that the FCA will consider this to be as much as a firm issue as it is an individual issue.

Matthew: So that puts the emphasis on HR, compliance, internal legal really to have a comprehensive review of their systems and controls and make sure that all their processes are adequate and reflect current back practice.

Laura: Exactly and I think there is an issue around some benchmarking, as with all new regulation its difficult sometimes for firms to gauge quite what is expected and I think part of the reason the FCA is writing at the moment to banks and insurers to request this data is to get a better sense of the benchmark, what are firms doing and what are the kind of numbers in terms of incidents that they are dealing with and on that front they have said that actually a firm that has a higher number of NFM incidences is not necessarily a sort of negative it might actually suggest that they have a culture in which people feel that can speak up conversely a firm which has a very low number of complaints and cases that its dealing with perhaps that means that…

Matthew: It’s either because they are squeaky clean or everyone is terrified.

Laura: Well exactly no firm is squeaky clean I think it is the reality of human nature isn’t it, so the FCA does expect firms to be dealing with these types of issues proactively.

Matthew: We are probably coming towards to the end of our time. I just wanted to explore with you the consequences for an individual having these serious allegations made against them and what you have thought the procedural safeguards that a firm ought to put in place in dealing with them should be, there was a lot of litigation some years ago where professionals across all sectors including people who were regulated by the general medical counsel, people regulated by financial services looked to have lawyers involved at all stages of internal disciplinary processes because they said the threat to my reputation and my whole future career is so great that I need that additional layer of protection. Employment practitioners loath the idea of over formal internal processes, where do you stand on that?

Laura: I think it’s a case by case basis judgement to be honest with you which would very much depend on the seniority of the person involved, the seriousness of the allegations, the extent to which the firm feels that it could have further ramifications in terms of you know notifying the FCA for example because the firm has its own obligations to notify the FCA of these matters and you know whether it has concerns about providing a regulatory reference, there is a lot of different things to consider and I don’t think you would necessarily want to have a rule in place that someone is entitled to pay for legal representation every time there is an NFM instance and in particular do you want to be funding someone’s legal representation if there is a concern that actually they have behaved quite appallingly? So there is a lot of different questions there and it’s not straightforward for firms but I think that one of the biggest procedural safeguards that you can have in place is just to make sure that you are complying with, you know it sounds obvious but complying with the firm’s internal policies, treating the matter with sufficient seriousness from the outset so having the right governance in place over the internal investigation and disciplinary, making sure that things are properly audited, thinking about privilege and making sure that you know to the extent that there is difficult conversations internally at the firm that need to happen, you are involving your in-house lawyers and having those discussions on a privilege basis so I think setting up the investigation correctly from the outset can save lots of complications further down the line.

Matthew: As I said right at the start your practice is very heavily tilted towards investigation so if listeners have any questions on that or any other matter I am sure you will be pleased to talk to them about either setting up the investigation or even conducting investigations for them. Thank you very much Laura. Both Laura and my contact details are in the episode description as usual and it just remains for me to say a big thank you to Laura for explaining this pretty knotty little area to us, thanks also, I never remember to say this, but thanks also to Diyana and Verity for sitting behind the scenes and making this podcast sound better than it would otherwise do. Tune in again next month for something else interesting. Thank you very much for listening.