FCA non-financial misconduct rules clarified

“Together we can raise standards, increase accountability and build workplaces where people feel safe to speak up”, an admirable sentiment expressed by Sarah Pritchard, Deputy Chief Executive of the Financial Conduct Authority (FCA) in its long-awaited (and overdue) final Policy Statement on Non-Financial Misconduct (NFM), published in December. 

The Policy Statement revises guidance to accompany the new rules on NFM as announced by the FCA last July and concludes the FCA’s policy work on NFM; cue supervisory and, in the most egregious of cases, enforcement action. But is the new guidance helpful for firms in preparation for implementation of the new rules on 1 September?  The answer is a very tentative and caveated, yes. 

To recap, the new rules widened the scope of the FCA’s Code of Conduct (“COCON”) in non-banks to clarify that the following “unwanted conduct” can amount to a conduct rule breach:

1. Violating a person’s dignity;

2. Creating an intimidating, hostile, degrading, humiliating or offensive environment; or

3. Violent conduct.

Under the new rules, such conduct may amount to a breach of COCON if it is:

1. Towards a colleague; and

2. Relates to the part of a non-bank’s business that conducts Senior Managers and Certification Regime (“SM&CR”) financial activities.

While the new rules explicitly apply to non-banks, the FCA has confirmed that NFM can amount to a breach of COCON in any firm. The Policy Statement has not changed the rules announced last July, rather it has clarified the accompanying guidance after consultation.

Respondents to the consultation requested additional guidance, case studies and examples to support consistent application of the new rules. In response, the FCA has stated that no guidance can cover every scenario and firms will need to exercise judgement. At first glance, this is distinctly unhelpful. However, the FCA has published new flow diagrams and a table of scenarios to demonstrate when conduct falls within the scope of the new rules, which are likely to prove useful. Firms with both FCA-regulated and non-FCA regulated businesses may find application of the rules particularly difficult as the FCA should not, theoretically, have jurisdiction over conduct in non-FCA regulated businesses. However, using a shared Internal Audit function as the example, the new guidance clarifies that conduct will be in scope if either the perpetrator or subject deals with the financial services business of the firm, but would be out of scope if both individuals worked in a separate function that did not deal with the financial services business. 

Responses to the consultation also questioned why the proposed guidance applied to all SM&CR firms when the new COCON rule only applied to non-banks. As many practitioners anticipated, the FCA’s response is that banks should arguably use the guidance to assist in determining whether conduct that can broadly be described as bullying or harassment or violence towards a work colleague is a breach of COCON. The FCA’s explicitly stated aim in introducing the new rules is to align the scope of COCON for both banks and non-banks. As a result, all SM&CR firms should consider the revised guidance and assess how it applies to their business. 

After publication of the new rules and proposed guidance last summer, some expressed confusion over when and how firms would be expected to investigate events in an individual’s private life when assessing fitness and propriety. While COCON does not apply to an individual’s private life, the FCA’s stance is that certain instances of NFM in an individual’s private life could be relevant to assessing fitness and propriety. In this context, to make matters more complex, the FCA has stated that NFM should be more broadly defined and not limited to the “unwanted conduct” described in the amended COCON. The extreme examples are obvious; where an individual has a criminal conviction resulting in a custodial sentence that is likely to be relevant. Equally obvious is that firms do not need to investigate trivial or implausible allegations. The clear difficulties for firms will lie somewhere in between, where many cases will fall. The FCA, in its Policy Statement 25/23, has attempted to provide assistance by explaining that conduct in an individual’s private life will be relevant to fitness and propriety if it shows that “there is a material risk that the individual will breach regulatory standards and requirements”.