Why is the FCA failing the industry on non-financial misconduct?

It is now nearly seven years since the FCA's Chris Woolard gave a speech with the often-quoted, yet not wholly accurate, line that "non-financial misconduct is misconduct, plain and simple".

As the FCA has never brought disciplinary proceedings against any financial services employee for a breach of "non-financial misconduct" (namely workplace harassment, sexual misconduct, bullying, improper discrimination or similar behaviour), it would be interesting to know whether it continues to stand by Chris Woolard's 2018 assessment of the position.

FCA action on non-financial misconduct has been limited to a small number of supervisory cases where it has prohibited individuals from working within the industry as a result of criminal convictions for offences such as fare-dodging and sexual offences outside the workplace. In one case it took similar action as a result of the Chair of a firm sending sexually explicit messages and using a work phone to access a premium rate chat line, in breach of the firm's internal policies.

In each case, the action taken by the FCA has been on the basis that individuals are considered unfit to work in the financial services industry in the future, but not for breaches of the personal duties that are owed under the Individual Conduct Rules (or, under the previous individual accountability regime, the Statements of Principle for Approved Persons) that would enable the FCA to impose a financial penalty on the individual for their misconduct.

The FCA is frequently made aware of non-financial misconduct in the workplace, including through whistleblowing reports, proactive notifications from firms, and periodic conduct breach reports by firms. In a recent letter to the Treasury Committee, the regulator stated that it was handling 76 "active" supervisory matters involving non-financial misconduct. And yet it seems highly likely that none of those matters will result in the FCA taking disciplinary action against individuals for the alleged non-financial misconduct. (The sole enforcement case that the FCA refers to in this context actually involves alleged failings of governance and interference with a firm's internal disciplinary process rather than allegations of non-financial misconduct).

Why do I say that disciplinary action is unlikely to be brought by the FCA in these cases? It is because the regulator is operating with one hand (perhaps both hands) tied behind its back, as its existing rules are patently not fit for purpose.

While employees of financial services firms are required under Individual Conduct Rule 1 to act with integrity while in the workplace, the FCA's Handbook provisions do not anywhere specify that non-financial misconduct amounts to a breach of this duty. As the courts have made clear, the duty to act with integrity must be construed in the context of the relevant rules, and so in order for Individual Conduct Rule 1 to catch non-financial misconduct this must be clearly stated in relevant interpretative provisions. None of the illustrative examples of misconduct currently given in the FCA Handbook include any form of non-financial misconduct.

Fixing this deficiency is not a difficult exercise, or one which would lead to an enhanced regulatory burden on firms. It could be done quickly and simply.

What is needed is the addition of a series of evidential rules (a category of FCA rule designated by an "E" which has evidential value in interpreting a binding FCA rule) which explain in simple, high-level, terms that behaviours such as harassment, sexual misconduct, bullying and discriminatory conduct in the workplace are non-exhaustive instances of a failure to act with integrity.

This would have the effect of enabling the FCA to bring disciplinary action against perpetrators of non-financial misconduct in the workplace and therefore impose substantial fines on them for the misconduct.

Cases of this nature would then send a clear signal to the industry that non-financial misconduct in the workplace is not tolerated, which will in turn ensure that this type of behaviour is not left unchallenged. This in turn will have a positive effect on the culture and working environments of UK financial services firms.

And yet the FCA seems to be systematically incapable of taking the necessary steps. Following the wave of 2018 speeches and correspondence on non-financial misconduct, it took nearly five years for a consultation paper covering non-financial misconduct to be issued by the FCA (CP23/20). This proposed a series of new provisions but they were never implemented.

A further consultation paper was issued in July this year (CP25/18) with a further set of draft provisions. However these new FCA Handbook provisions are included in non-binding guidance only, and do not contain any evidential rules that would alter the proper interpretation of the duty to act with integrity (Individual Conduct Rule 1) to ensure that non-financial misconduct is captured.

Furthermore, in the recent FCA letter to the Treasury Committee on non-financial misconduct the regulator worryingly stated that it has "not yet decided whether to make any additional guidance to help firms interpret the rules" (emphasis added), citing the potential cost burden on firms.

As this FCA letter and its recent SMCR consultation (CP25/21) make clear, the regulator now views itself as having largely outsourced policing and enforcement of the Individual Conduct Rules to regulated firms, who are expected to interpret those duties based on FCA speeches rather than on a proper interpretation of the FCA Handbook. This has led to highly inconsistent approaches being taken by firms in determining whether employee misconduct amounts to a breach of the duty to act with integrity. This inconsistency is itself highly damaging, as it means that certain individuals will face career-limiting consequences for their actions, while others are completely free to move to other firms without the relevant conduct having to be declared to the new employer). This current position is neither fair to employees nor desirable for the industry.

What is needed is a clear set of rules on non-financial misconduct that facilitates the FCA itself taking enforcement action against individuals in appropriate cases, and which also provides a clear framework for regulated firms to determine whether misconduct amounts to a breach of the Individual Conduct Rules on a fair and consistent basis. As explained above, this is not a difficult exercise but it is a critical one. The impact of making these changes would be to improve workplace culture, enhance fairness to employees, simplify internal conduct rules assessments for firms, and minimise the "rolling bad apple" effect of problematic employees moving from one firm to another. All of this must be positive for UK growth.

The FCA asserts in the recent SMCR consultation paper that its ability as regulator to take visible enforcement cases with public outcomes against individuals for misconduct is "necessary for deterrence" and is an important feature of the SMCR regime. It might talk a good game on non-financial misconduct and culture within financial services firms, but in reality the FCA's actions to date have fallen well short of what is both required and expected by the UK financial services sector.

Nathan Willmott is a Disputes & Investigations partner in London focusing on FCA and PRA investigations and enforcement actions.