Odey scandal shines a light on FCA’s poor approach to non-financial misconduct

It has been clear to regulatory and employment lawyers alike that the Financial Conduct Authority’s approach to non-financial misconduct just doesn’t really work.

Over the last couple of years, the FCA has issued a few statements about the relevance of non-financial misconduct to the assessment of an individual’s fitness and propriety but has struggled itself to apply this in practice.

However, nothing has shone a light on it quite as much as the recent accusations of inappropriate behaviour – mainly of a sexual nature – against Crispin Odey at Odey Asset Management, and the subsequent letter from the chair of the Treasury Committee to FCA chief Nikhil Rathi asking questions in relation to its response to such behaviour.

Rathi responded to the Treasury Committee’s questions, maintaining the FCA’s position it has taken a forthright stance and leading role among UK and international regulators on non-financial misconduct.

However, the FCA’s track record on taking enforcement action paints a different picture, with only seven successful prohibition orders for non-financial misconduct – all but one of them involving serious criminal convictions.

Even then, if those individuals had sought to appeal against the FCA, the outcome may not have stood up against the backdrop of the current rules. The fundamental problem is that the rules aren’t designed to deal with non-financial misconduct, particularly sexual misconduct inside or outside of work.

The assessment of fitness and propriety is currently viewed in the context of an individual’s ability to perform their regulated role, so, by its very nature, the conduct must be relevant to the individual’s practice as a financial adviser and must be shown to pose a risk to consumers and confidence in the financial system.

This is certainly what was decided by the Upper Tribunal in the case of Jon Frensham v FCA, which Rathi points to in his letter as an example of an FCA success.

However, it does seem astounding that this is seen as an FCA success story when the Upper Tribunal’s view was a conviction relating to child sexual grooming was insufficient alone to justify a prohibition by the FCA.

The Upper Tribunal upheld the FCA’s prohibition of Frensham because he also committed the offence in breach of his bail conditions and failed to inform the regulator of the conviction and his expulsion from a professional body.

If this is the FCA’s success story, it is difficult to see how sexual misconduct, particularly outside of work, can ever translate into an individual not being fit and proper if it can only ever be viewed through the narrow lens of their regulated activities.

Given the media’s coverage of the sexual misconduct allegations against Odey, it’s telling that the FCA’s investigation to date seems to have focussed on the other aspects of his non-financial misconduct, with no express reference made to any allegations of sexual misconduct in the FCA’s response.

However, the FCA notes that the scope of its investigation can change if stronger evidence comes to light.

The FCA confirms in its response that it intends to provide further guidance on the issue of the relevance of non-financial misconduct to the assessment of fitness and propriety, including how non-financial misconduct should be considered, within its rules later this year.

Although this will be welcomed by legal practitioners like myself, who are having to advise clients on making difficult decisions where there is a clear misalignment between the FCA’s strong rhetoric on non-financial misconduct and the rules themselves, it’s difficult to see how such guidance will be able to rectify the fundamental issue that the rules don’t work when it comes to non-financial misconduct, which can only be addressed by making  a change to the rules themselves.

This article was originally published in Money Marketing.