[co-author: Justin Brandt-Sarif]*
In 2018, the UK's Financial Conduct Authority ("FCA") stated publicly that "non-financial misconduct is misconduct, plain and simple", emphasising their view that the Conduct Rules applicable to most employees within regulated firms did not require amendment to bring behaviours such as bullying and harassment within their scope. Five years on, the FCA is proposing to amend the Conduct Rules to include explicitly such behaviour.
The FCA, together with the Prudential Regulation Authority ("PRA"), have recently published consultation papers on diversity and inclusion in the financial sector. The regulators' draft proposals, which are currently being consulted upon by industry stakeholders and which would be expected to come into force in 2025, include requirements on firms (dependent on their size and scope) to develop and publish diversity strategies, to monitor and report on staff demographics and to set diversity targets (see our prior update for a wider discussion on key questions around the consultation, the link to which can be found at the end of this article).
In addition, the FCA proposes to amend its Code of Conduct source book ("COCON") expressly to include non-financial misconduct ("NFM") such as serious instances of bullying and harassment (including sexual harassment) and to provide guidance on what types of behaviour would fall within the newly expanded scope and what would not.
The proposals apply principally (with limited exclusions) only to employees that carry out their activities predominantly in the UK. For overseas firms (e.g. non-UK headquartered firms with a branch or subsidiary in the UK), the proposals apply only to activities of that branch or subsidiary that are carried out from "an establishment in the UK".
NFM in an employee's personal or private life
The new rules state that employee conduct in their personal or private life will fall outside of COCON. While sensible at first glance the courts and regulators have generally struggled to identify where the line should be drawn between behaviour that is considered work-related and where it is "private".
The proposed amendments to COCON contain examples of conduct that will generally be considered in scope if performed by a hypothetical employee ("A"), such as:
- misconduct by A in relation to a fellow member of the workforce while both are on the firm's premises;
- misconduct by A in relation to a fellow member of the workforce while A is working remotely;
- misconduct by A in relation to a fellow member of the workforce when both are travelling to a meeting in which they will represent their firm;
- misconduct by A in relation to a client at a business meeting in which A is representing their firm;
- misconduct by A in relation to a fellow member of the workforce at a social occasion organised by the firm;
- misconduct by A in relation to a fellow member of the workforce at a social occasion organised by a client of the firm in which they will represent their firm or where the main reason for the invitation is working for the firm.
By way of contrast, misconduct to a member of the public whilst commuting or to a colleague at a social occasion organised in a personal capacity are identified as not falling within COCON, although these may still be relevant to assessments of fitness and propriety for senior managers and certified staff.
Only serious breaches are included
The FCA's consultation paper relates NFM to Conduct Rule 1 (acting with integrity) but the amended COCON states that "…not every lapse from (Rule 1) will involve a breach of COCON. Only a serious departure from it is likely to be a breach."
Guidance is provided as to what a 'serious' breach might look like and factors to consider include:
- whether the conduct is repeated or part of a pattern;
- the duration of conduct;
- the size of the impact on the subject of the conduct and on those who witnessed or heard about the conduct;
- the likelihood of damage to the firm's culture;
- the seniority or difference in seniority between employee A and the subject of the conduct.
Misconduct that will be considered a breach of Rule 1 under updates to COCON will include:
- intimidating or violent conduct;
- seriously offensive, malicious or insulting conduct;
- unwanted conduct that has the purpose or effect of violating the dignity of a fellow member of the workforce;
- unwanted conduct that has the purpose or effect of creating an intimidating, hostile, degrading, humiliating or offensive environment for the fellow member of the workforce;
- bullying.
FCA emphasis on 'intention' rather than 'effect'
The list of examples above is caveated by the supplement to COCON that misconduct may not be within the scope of Rule 1 if the staff member committing it:
- thought there was a good and proper reason for the conduct; or
- did not intend to have a negative impact on the subject of the misconduct, did not know they were doing so and was not reckless in their conduct.
This contrasts with the well-established principle in employment law that it is generally the effect of the conduct that matters, not the intent.
Breaches of Rule 2
The amended COCON makes clear that managers may find themselves in breach of Conduct Rule 2 (acting with due care, skill and diligence), if they fail to (i) protect staff against NFM, or (ii) take their complaints seriously. Specifically, breaches of Rule 2 will include:
- failing to take reasonable steps to protect staff against treatment of the kind described above; or
- failing to take seriously or to deal effectively with complaints of behaviour of the type described above.
Fitness and Propriety
In addition to the COCON changes, the FCA proposes to amend the Fit and Proper test for Employees and Senior Personnel sourcebook ("FIT"). In particular, matters considered out of scope of COCON because they are part of an employee's personal or private life may still be taken into account when assessing fitness and propriety. Updates to FIT state that: "misconduct…outside the regulatory system may show the person lacks moral soundness, rectitude and steady adherence to an ethical code, which in turn raises doubts as to whether they will follow the requirements of an ethical system".
Implications for firms
The consultation paper is a bold statement of intent from the FCA, making clear its view that NFM is misconduct that falls within its remit…in the right circumstances. And there, perhaps, is where things are not so "plain and simple".
It remains necessary to consider the circumstances of the conduct, including:
- Was it private or work-related?
- Was it serious?
- What was the intention?
We will wait to see whether any of the proposed changes are altered as a result of the responses to the consultation but the FCA's direction of travel in relation to NFM remains clear. It views NFM as very relevant to the assessment of breaches of the Conduct Rules and to the assessment of fitness and propriety. It has said so for some time and now, in case there was any doubt, its proposed amendments make the position very clear.
You can find out more about our work in the DE&I space on our DEI practice page and via the OPEN Talks series.
As mentioned above, our related article, examining the other proposed new requirements contained within the FCA and PRA proposals, can be found here.
*Trainee Solicitor
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