Employment | Private Equity | Retail Financial Services
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The Financial Conduct Authority (FCA), alongside the Prudential Regulation Authority (PRA), has published a consultation paper on proposals to introduce a new regulatory framework on Diversity and Inclusion (D&I) in the financial sector, including changes to the treatment of non-financial misconduct as misconduct for regulatory purposes.
The FCA's approach to non-financial misconduct has been under increasing scrutiny with questions around the FCA's rules on fitness and propriety and whether they are fit for purpose in addressing non-financial misconduct. For more on this, see our recent article.
The FCA's recent consultation paper sets out its proposals to deal with this, with the recommendation non-financial misconduct should be built into the Conduct Rules for staff (COCON), Fit and Proper assessments and the suitability criteria for firms to operate in the financial sector (Threshold Conditions (COND)).
The proposals are intended to apply to firms of any size with the aim of reducing discrimination and misconduct. They are summarised below:
Expansion of the scope of COCON to cover serious instances of bullying, harassment and similar behaviour toward fellow employees and employees of group companies and contractors.
The FCA proposes to add guidance on the types of behaviour that may breach the conduct rules, as well as conduct that is “out of scope” where it relates solely to an employee’s personal or private life. The FCA also refers to an exception where the misconduct “clearly relates to a part of the firm’s business that does not carry on any financial services activities”. Disciplinary action will only be taken for “serious” breaches, or multiple instances that are collectively “particularly serious”.
Provision of a more detailed explanation of how non-financial misconduct forms part of the Fit and Proper test for employees and senior personnel.
It’s proposed that bullying, sexual or racially motivated offences and similar misconduct within the workplace would be relevant to fitness and propriety and similarly serious behaviour in a person’s personal or private life would also be relevant. If an individual is not Fit and Proper, the FCA may withdraw approval and/or impose a partial or full prohibition, depending on the level and type of risk posed by the individual in question. Conduct that could damage public confidence in the UK financial system is also likely to mean that the person is not Fit and Proper.
Extension of the suitability guidance on COND, to include offences relating to a person or group’s demographic characteristics (such as sexual or racially motivated offences) and tribunal or court findings that the firm, or someone connected with the firm, has engaged in discriminatory practice as relevant.
The FCA also proposes to require certain firms to:
Except for employee numbers, the proposed data reporting requirements would only apply to large firms, defined as those with over 250 employees, and for CRR and Solvency II firms of any size.
Whilst the FCA have taken steps in the proposals to address the criticisms surrounding the rules on non-financial misconduct, ambiguity remains, particularly in relation to COCON where further guidance is needed.
For instance, at what point does conduct towards colleagues outside of the workplace become "private life" and hence out of scope of the conduct rules; and at what point does conduct reach the "serious" threshold.
There also appears to be a clear discrepancy between the FCA's approach to financial misconduct in respect of COCON compared with the Fit and Proper assessment, in which a wider range of non-financial misconduct may be caught.
In respect of the D&I reporting requirements, whilst data collection and transparency is a key first step in improving D&I in the financial sector, the proposals fail to clarify at what point this will translate to the FCA making interventions or taking enforcement action, if at all.