Lawyers warn regulator will want to send a strong message over non-financial misconduct
There has been an uptick in firms facing scrutiny over non-financial misconduct, say lawyers, and this won’t be slowing down anytime soon they have warned.
James Alleyne, legal director at Kingsley Napley noted, “non-financial misconduct is clearly a priority for the FCA.”
He added: “regulated firms are certainly more conscious than ever about staff behaviour in all forms.”
The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) set out proposals in late September to boost diversity and inclusion to support healthy work cultures. The proposals included new rules and guidance to make clear that misconduct such as bullying and sexual harassment pose a risk to a healthy firm culture.
James Green, director at Burges Salmon noted there have been “some recent very serious instances of misconduct where the regulator is taking action.” He added, “firms would expect this type of behaviour to merit strong action from the regulator”.
However, he pointed out that what is “challenging for firms” is the way less serious conduct is potentially being scoped in with these rules. He explained that in some cases firms may have to make “moral judgements about the behaviour of their staff.”
Alleyne added: “Although to date we have not seen any businesses being penalised by the regulator for non-financial misconduct by their staff, with a range of new rules expected in this area in 2024, it is certainly something that is likely to happen sooner rather than later.”
Green said one thing the regulator is very clear about is “conduct outside work is relevant to fitness and propriety, so the standards that the regulator expects senior people in financial services firms to uphold.”
He explained the regulator has stated that behaviour outside the workplace which is “disgraceful or morally reprehensible”, should be a regulatory issue, which he pointed out is a “type of language that carries a real subjective judgement and risk of inconsistency.” He added that as cultures are very different at each firm, he knows “this represents a real difficulty for firms” who are being asked to make those types of judgments without clear guidance on how this should be done.
Alleyne explained that “with new rules expected next year, in time we will see outcomes which make clear both the regulator’s expectations and also how far it is willing to push at the boundaries of its powers.”
“By bringing these cases, the FCA will want to send a strong message to firms that non-financial misconduct needs to be taken as seriously as financial misconduct,” he added.
Green advised that firms should be “proactive” as this is coming down the track. He said firms should make sure employees are trained and aware of the required standards. He noted that firms should be having discussions about how they might deal with difficult issues.
He added firms might consider having a “cultural audit” to take a proactive look at its culture and how people feed into its workplace.
Alleyne added: “Firms should be very closely scrutinising the FCA’s recent Consultation Paper “Diversity and inclusion in the financial sector” and proactively considering what changes they will need to make to their internal governance to get ahead of the curve.”
“This may involve refreshing their codes of ethics and conduct, staff handbooks, training programmes, fitness and propriety assessments and whistleblowing procedures,” he added.
It is worth noting it is not only the FCA that firms have to keep an eye out for. Last week the CEO of specialist insurance CFC Group and the CEO of CFC Underwriting were announced to be leaving the business after an investigation by Lloyd’s into allegations of non-financial misconduct.