In September 2023, the FCA and the PRA launched consultation papers which aimed to consult on an upgrade to the current regulatory framework around diversity and inclusion in the financial services sector. The proposals in the FCA’s consultation paper (‘CP23/20: Diversity and inclusion in the financial sector – working together to drive change’) included bringing non-financial misconduct more clearly within the scope of the SMCR regime, requiring large firms to report on diversity and inclusion data and requiring large firms to put in place a strategy and targets for diversity. In Annex C to the consultation paper, the FCA sets out its proposed amendments to the conduct rules and in Annex E to the consultation paper, the FCA sets out its proposed amendments to the fit and proper test for employees and senior personnel (FIT).
Jackie Thomas and Shiv Raja outline below some of the key points covered in their recent ‘Foxed?’ podcast focussing on non-financial misconduct which is available here.
- firms currently have to decide whether non-financial misconduct (including conduct outside the workplace) is a fitness and propriety issue and/or a breach of the conduct rules without the benefit of detailed guidance from the FCA. There is an express clarification in the consultation paper that the concept of misconduct which most firms are already familiar with includes non-financial misconduct e.g. bullying and harassment.
- in the consultation paper, the FCA proposes to make it explicit that non-financial misconduct will be included within the conduct rules, fitness and priority assessments and suitability guidance in relation to whether a firm satisfies the FCA’s threshold conditions. The FCA also proposes to add guidance in the FCA’s Handbook as to how non-financial misconduct should be incorporated into regulatory references.
- currently, except in the case of banks, the application of the conduct rules to firms is restricted to SMCR financial activities and certain kinds of misconduct that could have serious effects. In our view, the effect of this is that conduct which is wholly unrelated to those regulated activities is unlikely to amount to a breach of the conduct rules. The FCA proposes to expand the scope of the conduct rules to make it clear it covers things like bullying and harassment towards fellow employees and it proposes to add guidance into the conduct rules in relation to when the conduct would fall within scope and also when it would be out of scope because it relates to someone’s private or personal life.
- the fitness and propriety assessment does not have the same limitations in relation to scope as the conduct rules. The fitness and propriety test currently looks at a person’s wider suitability for a role, including misconduct within and outside the workplace. In its proposals, the FCA proposes to explain that non-financial misconduct e.g. bullying, should be taken into account when assessing fitness and propriety. The FCA also proposes to provide examples of non-financial misconduct e.g. sexual or racially motivated offences.
- there is proposed new guidance in the conduct rules relating to ‘misconduct in relation to fellow members of the workforce’, which means that the treatment of a colleague at work is a matter which is potentially a breach of conduct rule 1 (acting with integrity). However, the consultation states that only misconduct in relation to a fellow member which is serious will be a breach, which means not every instance of misconduct towards a fellow member of the workforce will amount to a breach.
- the guidance sets out a number of factors the FCA would take into account when deciding whether misconduct in relation to a fellow worker is serious enough to amount to a breach of the conduct rules. Some of the things the FCA would look at include whether the conduct is repeated or part of a pattern, what the seniority is of the person whose conduct is in question, whether there is a disparity in seniority between them and the person impacted, whether the conduct is related to a protected characteristic and whether the person has previously undertaken not to do the act in question.
- there is also proposed new guidance in relation to rule 1 of the conduct rules which gives individuals a possible “defence” where they thought there was a “good and proper reason” for the conduct or where they did not intend to have a negative effect on their colleague, did not know that they were doing so and were not reckless as to the effect of their conduct.
- there is a regulatory risk for managers in breaching rule 2 of the conduct rules (‘acting with due skill, care and diligence’) if they fail to take reasonable steps to protect staff or fail to take seriously or deal effectively with complaints in relation to a fellow member of the workforce.
- the impact of the proposed amendments could be that there is a greater risk of individuals and firms falling foul of the rules arising out of non-financial misconduct and increased risk of sanctions by the FCA. Consequently, individuals who are accused of non-financial misconduct may feel they have to fight to clear their names where they believe a decision has been taken that is not fair.
- there could be a greater risk for firms because in addition to the impact on the conduct rules and fit and proper assessments, the proposals include amending the current examples of the considerations to which the FCA may have regard to when assessing whether a firm will satisfy threshold conditions so going forward it will include non-financial misconduct, such as where the firm or a person connected with the firm has been found by a tribunal or court to have been engaged in discriminatory practices.
