Non-financial misconduct – are you ready for the FCA’s and PRA’s new regulatory framework?

Introduction

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) recently published their respective consultation papers setting out their rules on non-financial misconduct together with the expected standards that financial service providers are to meet.

What is non-financial misconduct? 

There is no legal definition but it is intended to encapsulate any misconduct that constitutes  criminal behaviour, bullying, sexual harassment, or any acts of discrimination.
Moreover, it is also the first time that either regulator is proposing to put non financial misconduct on a similar footing to financial misconduct. But, I think, one of the most important aspects is that these rules and standards can, in certain circumstances, continue to apply even when outside of a regulated individual’s working hours.

What are the expected standards?

When a regulated individual provides financial services, the FCA’s expectation is that they:

1. Act with integrity and with all due skill, care, and diligence;
2. Are open and cooperative with financial service regulators;
3. Pay due regard to the interests of the customer and treats them fairly; and
4. Observe the proper standards of market conduct.

At the senior management level, the FCA’s Senior Management Conduct Rules require that reasonable steps are taken to ensure that:

1. the business of the firm for which the manager is responsible is controlled effectively and that it complies with the relevant requirements and standards of the regulatory system;
2. any delegation of the manager’s responsibilities is to an appropriate person provided that that manager oversees the discharge of those responsibilities; and
3. appropriate disclosure of any information that a financial services regulator would ought to reasonably expect notice of is made.

In addition to these conduct rules, senior managers and certified individuals are required to be fit and proper. In other words, they are assessed on an ongoing basis in respect of (1) their honesty, integrity, and reputation (2) their competence and capability and (3) their financial soundness.

How does non-financial misconduct come into play?

The lack of definition means that misconduct of this nature is broad in scope and potentially applicable to many situations. Naturally, it is left to the judicial system and appropriate regulating bodies to interpret and develop this concept. It is worthwhile, therefore, looking at a couple recent cases which explored this issue.

Frensham v FCA

Mr. Frensham (a sole director and financial adviser of a financial services firm)  was issued with a prohibition order by the FCA  following a conviction for child grooming deeming him to be unfit and improper to work in financial services. Mr. Frensham appealed the decision to the Upper Tribunal arguing that the FCA’s decision was unfounded on the basis that his criminal conviction:

1. did not involve findings of dishonesty;
2. related to events that took place entirely outside of work; and
3. was not sufficiently linked to his capability as a financial adviser.

Interestingly, although the Upper Tribunal upheld the FCA’s decision, it found that Mr Frensham’s criminal conviction alone would not have been a sufficient ground for the FCA to deem him unfit and improper. While the FCA was criticised for failing to “forge the necessary link” between Mr Frensham’s criminal offence and his professional work, the Tribunal did find that the manner in which Mr Frensham dealt with his conviction was reason enough to deem him ‘unfit’ because:

1. he failed to notify the FCA that he had been arrested of the offence that led to his conviction;
2. his statement of professional standing was not renewed; and
3. he displayed a lack of remorse for his actions.

For those reasons, the Upper Tribunal upheld the FCA’s decision.

Lloyd’s Notice of Censure against Atrium Underwriters Ltd.

Lloyd’s of London issued a notice of censure against one of its members, Atrium Underwritings Ltd which detailed the unacceptable behaviour complained of as well as the fine of £1.05million and costs order of more than £560,000 which it made against the underwriter.

During its investigation Lloyd’s found that, despite Atrium’s knowledge of the serious acts of misconduct being committed against a junior employee over a number of years, it had done nothing to protect the junior employee nor did it subject the perpetrator to any disciplinary action due to his senoirty and fear of bad publicity.

Instead, they allowed him to resign under a settlement agreement. Moreover,  it was found that two senior managers both condoned and joined in on Atrium’s annual ‘boys’ night out’ which involved heavy drinking, initiation games, and making inappropriate and sexualised comments about female colleagues.

Lloyd’s found that Atrium significantly breached its own workplace policies and failed to uphold the standards required of it. Christopher Stooke (Atrium’s indepedent non-executive chair) commented: “the behaviour in the notice of censure has no place in our business or our industry, and we recognise that we must go further to ensure that this situation is never allowed to happen again.”

Summary

Clearly, considerable changes will come into effect after the FCA’s and PRA’s consultation process and financial service companies must be prepared to ensure that they are in the best position possible to ensure they are able to fulfil both their legal and regulatory duties.

SMB is well-versed in advising companies on how to prepare and implement anti-discrimination/anti-harassment policies and are well placed to advise on internal investigations. Should you need our assistance, please reach out to our employment team.