Inclusion across financial services: how firms are dealing with non-financial misconduct

Last month the Financial Services Culture Board and the Financial Services Skills Commission published a report on inclusivity in the financial services sector (Inclusion across financial services: Piloting a common approach to measurement), highlighting the importance of measuring inclusion in the workplace, developing a culture of listening, and prioritising inclusion alongside diversity in the Boardroom when attracting and retaining talent across the sector.

This is certainly not a new message.  Over the last couple of years, and off the back of the #metoo movement, the Financial Conduct Authority (FCA) has been keen to push the importance of speaking-up, having an inclusive culture and how non-financial misconduct may impact on an individual's fitness and propriety. 

However, such cases are rarely straightforward and will depend on individual facts and circumstances that need to be considered carefully, particularly where it could be career-ending for the individual.  The difficulty comes in determining whether the misconduct affects the individual's ability to perform a regulated role, particularly where the conduct happened outside of work.  

A firm will need to consider whether such conduct means that the individual has failed to act with honesty and integrity or due skill, care and diligence and, in doing so, their conduct has fallen below the standard expected of the individual given their role and regulatory position. 

Perhaps the most difficult situation for a firm to deal with is that involving sexual misconduct outside of work and how this links into professional standards. 

Where the conduct takes place at work, the individual is acting in their professional capacity and the regulatory standards come into play.  When they're not, it is much more difficult to say how their behaviour impacts on the assessment of fitness and propriety when wearing their regulated hat.  As such, the FCA has had difficulties justifying taking enforcement action in these circumstances and has been more successful where their focus has not been on the sexual misconduct, but the individual's actions after the event, in particular the timing of notifications to the FCA and transparency about their conduct.

So, where does this leave a firm who finds itself in this difficult situation? From the limited cases there are on the matter, the guidance suggests that regulated individuals are not expected to be "paragons of virtue", but they must comply with the rules and standards of the profession. 

However, this doesn't really give a firm much to work with, particularly where they need to carry out their own assessment of an individual's fitness and propriety in a Certified Function role, balancing their regulatory obligations against the risk of potential employment and other claims if they get it wrong, particularly when giving a regulatory reference could end someone's career.

What does seem to be clear is that non-financial misconduct out of work is relevant to the assessment of fitness and propriety and a firm can consider incidents in an individual's private life when making this assessment. 

It's also clear that there must be a link between the misconduct and how the individual performs their role, but this is where there is currently a distinct lack of guidance from the FCA.  As such, firms will need to tread carefully when dealing with these difficult issues and have robust systems and processes in place. Firms will need to ensure that they carry out a full and thorough investigation into any allegations, dealing with such matters under their disciplinary procedure. 

HR and compliance need to be joined up from the start on the employment and regulatory aspects, ensuring that misconduct allegations are properly referenced in the disciplinary invite letter with appropriate references to the conduct rules. 

Firms will also need to consider how the allegations and disciplinary process will impact on any regulatory reference and the potential implications for the individual and their career.  Under the regulatory reference rules, an individual should have the opportunity to comment on information in the regulatory reference so their views can be considered when the firm decides what to include in the reference. 

This is another reason to ensure that allegations investigated under the disciplinary process are linked back to the conduct rules and, where relevant, the firm's assessment of that individual's fitness and propriety.  Most importantly, firms should ensure that they have a comprehensive paper trail in place, including not only evidence obtained through the investigation, but also setting out their rationale for any decisions made, in case ever challenged by the FCA or the individual. 

Given the potential impact of a negative regulatory reference on the individual and their career, firms will need to be prepared for this challenge and keep it front of mind throughout the process. Employers should be especially mindful where there is a risk of an unfair dismissal claim from the employee. An Employment Tribunal recently ordered a bank to re-engage a former employee, as the adverse reference prevented the Claimant from finding alternative employment. The Tribunal awarded the employee £1.5 million to cover the Claimant's lost salary and benefits between dismissal and re-engagement. For further details about the case, please see Charlie Maples' article here.