The reforms have been in the works since 2021, when the FCA first revealed it was going to release rules and guidance on the matter, but lawyers had lamented a lack of support two years on, especially following the sexual misconduct allegations against Crispin Odey.
FCA and PRA eye stricter rules for non-financial misconduct
Claire Cross, partner at Corker Binning and a former senior lawyer in the FCA’s enforcement division, said there had been “surprisingly little guidance” from the FCA, despite “repeated rhetoric” that harassment and bullying would amount to a breach of conduct rules.
As a result, she said the consultation was a “long-awaited, positive step forward”, although it was lacking any examples of practical applications.
The paper also set out the regulators’ expectations when it comes to diversity and inclusion in the sector, in a bid to boost inclusivity and representation across the industry.
Priti Verma, chief risk officer at Quilter, said the consultation sends a “clear message” against “poor office behaviours”, which will no longer be tolerated. “The financial services sector needs to go much further to break down perceptions that it is a ‘boys’ club’, as it is this that directly prevents women and girls viewing financial services as a potential career,” she said.
“The regulators’ intervention is a timely reminder us all about how important diversity at the very top is in setting a healthy corporate culture, where people are free to speak. And that includes diversity in general – not just gender diversity.”
However, Verma argued that making people feel comfortable in their workplace should be the “bare minimum” – when it comes to diversity, there needs to be a “greater strategy” and a lack of diversity should be considered a “non-financial risk”.
She added: “Getting it right can help improve both business performance and investment returns. More diversity on boards means more varied perspectives and experiences, which allows for more effective decisions to be made, and group think to be challenged.”
FCA criticised over ‘unhelpful’ approach to non-financial misconduct cases
Sophie White, partner in the employment division at Eversheds Sutherland, echoed Verma, arguing the proposed reforms are part of a recovery and resilience process in a bid to move away from under-representation.
She added: “In the consultation, the regulators have recognised the importance of proportionality, and that smaller firms (250 employees or less) and limited scope firms should not be subject to the same requirements – for example, mandatory reporting of certain diversity data, strategies and targets. Importantly, rules on non-financial misconduct would apply to all firms whatever their size.
“In order for larger firms to comply with the reporting proposals, data collection will be central to progress. The manner and success of its collection across companies to provide comparisons and create a benchmark will be vital. But meeting this ambition will be made difficult if engagement with employees around the importance of data collection, and how the data will be used, is not done correctly.”
When it comes to data, Matthew Nunan, partner at Gibson, Dunn & Crutcher and former FCA head of wholesale enforcement, highlighted some areas of “concern” in the proposals. For instance, if employees decline to take part in surveys or answer questions, according to the PRA this would translate into a “lack of inclusiveness”, he explained.
Nunan added that, as a result, there is a risk the reforms will turn into a “box-ticking exercise”.
“Targets must be set and while they may be missed, this could lead to regulatory pressure. Neither of these approaches is necessarily wrong but could easily lead to box-ticking or pressure simply to ‘get the numbers up’ rather than a more nuanced, thoughtful approach.”
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Corker Binning’s Cross and James Alleyne, legal director in the financial services regulatory team at Kingsley Napley, both noted that, up until now, the FCA’s actions on non-financial misconduct had been limited to taking a stance in the “most egregious” cases, following convictions from the criminal courts.
But Alleyne said the proposals “signal that the FCA is stepping up a gear in its approach to non-financial misconduct in the widest sense”.
“It makes clear a range of behaviours that it considers to have a bearing on the culture of regulated firms and which will be considered as part of a regulated person’s fitness and propriety,” he explained.
“Regulated firms and individuals should have no doubt that this represents a big shift in the way the FCA will monitor and potentially sanction those in the financial community. They should be carrying out an audit now and setting a forward-looking strategy to ensure that they are ready and able to deal with the forthcoming changes.”
Polly James, partner and global practice co-leader in financial services disputes and investigations at Bryan Cave Leighton Paisner, said the consultation paper has an even broader remit than the Equality Act, as it “attaches regulatory consequences” to behaviours that are not related to any ‘protected characteristics’, instead focusing on the seriousness of the behaviour itself.
“This appears to be another example of important areas where the protections offered to individuals by the regulatory regime may be stronger than the protections offered by employment law,” she argued. “On the other hand, the FCA’s proposed new guidance will not have binding effect, and so firms cannot be fined for non-compliance with them.
“Another unexpected aspect of the proposed new FCA guidance is the section proposing to update the FCA’s guidance on the ‘suitability’ threshold condition to include a consideration of whether the firm has been engaged in ‘discriminatory practices’. The threshold conditions are minimum standards that firms are required to meet to remain authorised; potential breach of the threshold conditions gives the FCA the power to trigger its supervisory intervention powers. We are seeing the FCA make much heavier use of its supervisory intervention powers, consistent with its current three-year strategy.”
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James also highlighted a provision, which she deemed a “potentially generous safe harbour from liability”, as the FCA may be more lenient on an individual for breaching the conduct rules if they “meant well but made an ill-judged comment”.
She said this, if passed, will probably become a “favourite provision” for professionals accused of poor interpersonal conduct, as well as for their lawyers.
