In the fast-paced and ever-evolving world of financial services, it is essential for employers to prioritise setting an appropriate culture. This includes addressing any allegations of non-financial misconduct (NFM). NFM encompasses a wide range of behaviours, such as sexual harassment, discrimination and bullying, which can have a detrimental impact on the culture and reputation of a firm. In this blog, we consider the latest proposals on NFM from the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) (in CP 23/20) and explore the regulatory and employment law challenges faced by employers in the financial services sector.
Increasing awareness and reporting
Over the past few years, there has been a notable increase in the reporting of NFM incidents within the financial services industry. In recent years, the FCA whistleblowing line has witnessed a surge in complaints relating to sexual harassment and culture. This demonstrates an increased willingness to report conduct that is unacceptable.
Regulatory intervention
We are also seeing an increased willingness among employees to speak up, directly to their employer. The increased regulatory intervention by the FCA in particular does appear to have played a role in empowering individuals to speak up against NFM. The issuance of Dear CEO letters, active investigations and the promotion of whistleblowing mechanisms have likely contributed to giving employees greater confidence in reporting incidents. At the same time, some financial institutions have adopted a zero-tolerance approach towards discriminatory behaviour.
The latest developments are set out in the FCA and PRA’s consultation papers on diversity and inclusion in financial services. The FCA proposes draft guidance on what is meant by NFM and its relevance to the Conduct Rules, fitness and propriety and suitability threshold condition.
Challenges in investigating NFM
Investigating allegations of NFM continues to present unique challenges for employers. The responsibility for conducting investigations may vary across firms, ranging from HR teams to internal audit or legal departments. The need for independence and objectivity in investigations is paramount, as highlighted by instances where executives have taken drastic measures to avoid investigations into allegations of their own misconduct. Further, where employees insist on anonymity, this can limit the employer’s ability to fully investigate or put allegations to the person accused, in a way that would be fair to that employee’s interests.
Investigations into NFM related to employees’ private lives can be particularly complex due to privacy concerns and limited documentary or witness evidence. The FCA/PRA consultations provide specific guidance on when out-of-work NFM may be relevant to fitness and propriety and clarifies that out-of-work NFM will not be in scope of the Conduct Rules. They also recognise that sometimes it will be necessary to have external assistance and that firms need to pre-plan for when that might be.
The regulators recognise it can be unclear whether NFM arises in work-related or personal contexts and provide detailed draft guidance on this point, which is welcomed. Many firms have for some time worked on the basis that NFM at work should be considered as a breach of Conduct Rule 1, the duty to act with integrity. The draft guidance provides examples of when this will be the case. Conduct Rule 2, the duty to act with due skill, care and diligence, may also be relevant.
Balancing employment law and regulatory compliance
When addressing NFM, one of the key tensions employers face is balancing employment law obligations with regulatory requirements. While employment law considerations are critical in ensuring fairness during investigations and disciplinary actions, the FCA’s expectations often prioritise swift action and reporting to mitigate risks to the firm. The overlay between regulation and employment law is not always recognised by the regulators. Further scope for tension arises from the FCA’s guidance on NFM as a Conduct Rule 1 breach as in its proposals the FCA has introduced the relevance of intention, a concept of no bearing to discrimination or harassment under equalities legislation.
Looking ahead, it is important for employers to continue to reflect on their organisational culture and ensure a safe environment for all members of staff, including providing a means to raise potential concerns and to provide them with confidence that matters will be looked into fairly. The final guidance on NFM from the consultation will, hopefully, provide further direction for employers. It remains a priority for firms to create a workplace that fosters respect, inclusion and accountability.
