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Expansion of failure to prevent: The theory is almost reality
Louise Hodges
On 25 September 2023 the FCA published Consultation Paper CP23/20 (CP23/23) on “Diversity and inclusion in the financial sector – working together to drive change”. The consultation is wide ranging in scope with a stated aim of ‘boosting diversity and inclusion to support healthy work cultures’. As well as containing various proposals to boost diversity and inclusion generally across regulated financial services, the consultation contains a number of proposals relating specifically to the issue of non-financial misconduct.
The FCA has long viewed non-financial misconduct, which can encompass behaviour from inappropriate workplace banter all the way through to criminal convictions for serious violent and sexual offences, as being a key driver of poor culture and, by extension, something that fundamentally undermines trust in the financial sector. As far back as 2018 the FCA publicly stated that “non-financial misconduct is misconduct plain and simple” and events since then has shown that its attitude on this remains consistent.
Clarifying an uncertain position
Practically, however, the law on this has, to date, been less clear-cut. Although the FCA has managed to persuade its Regulatory Decisions Committee to impose a number of prohibitions for non-financial misconduct (typically against individuals convicted in the criminal courts of serious offences), the Upper Tribunal in the case of Jon Frensham v FCA, which involved the prohibition of an IFA who had been convicted of attempting to meet a child following sexual grooming - took a different position and was critical of the FCA.
Dismissing the FCA’s attempts to link Mr. Frensham’s offending to his professional role as “speculative and unconvincing”, it held that “popular outcry” by itself is “not proof that a particular set of events give rise to any matter falling within a regulator’s remit” and found that it was incumbent on the FCA to link the specific facts of a case to applicable regulatory provisions, including its statutory objectives, in order to justify enforcement action on the basis of non-financial misconduct. Although the Upper Tribunal ultimately upheld Mr. Frensham’s prohibition, this was on the basis that he had breached his bail conditions and had failed to open and transparent with the FCA and, indeed, made clear that, had these factors not been present, the fact of his conviction alone would not have been sufficient to justify a prohibition.
A number of the proposals in CP 23/20 relating to non-financial misconduct appear to be a direct response to this decision and strongly imply the FCA fundamentally disagrees with the Upper Tribunal. In particular, the FCA is proposing to explicitly include non-financial misconduct within its Conduct Rules (“COCON”), fitness and propriety assessments and, perhaps most significantly, within the guidance to the Suitability Threshold Condition, the implication being that it sees this issue as so fundamental that it goes to the very heart of whether a firm is fit and proper to be regulated at all.
More specifically, the proposals include making it explicit that “bullying and similar misconduct within the workplace is relevant to fitness and propriety and that similarly serious behaviour in a person’s personal or private life is also relevant” and also expanding the scope of COCON such that it explicitly covers bullying, harassment (and similar behaviours towards colleagues). Although CP23/20 does state that not every incident would necessarily mean a breach of the rules, and that “only serious misconduct would amount to a breach”, in practice, if adopted, such rules would be likely to add to the compliance burden on FCA regulated employers as well as increasing the enforcement risk for both firms and individuals for conduct that historically has not been within the FCA’s remit.
Widening the FCA’s remit?
Further, the proposal to bring offences relating to a person or group’s demographic characteristics (e.g. sexually or racially motivated offences), or findings from a tribunal or court that a person (or connected party) has engaged in discriminatory practices, within the scope of the Suitability Threshold Condition is particularly interesting. In theory, at least, this would mean that the FCA could act on its own initiative – without any recourse to the firm - to vary or cancel its permissions, or impose supervisory requirements on it, as a result of non-financial misconduct considerations. This would be a substantial expansion of the FCA’s remit over regulated firms and would likely have a real impact upon how they treat non-financial misconduct in the future.
Clearly, these proposals reflect both the FCA’s clearly held view that its jurisdiction should encompass non-financial misconduct and the practical difficulties it has experienced to date in taking action on these grounds. Those in the regulated sector should consider this consultation carefully and be proactively assessing whether their current control framework is adequate for the likely raft of new provisions and also analysing what risks they may be exposed to going forwards.
Further Information
If you have any questions or concerns about the topics raised in this blog, please contact James Alleyne or any member of the Criminal Litigation team.
About the Author
James Alleyne is Legal Director in the firm’s Financial Services Group. He advises clients on the full spectrum of financial services and FCA-related matters, including on authorisation applications, perimeter and supervisory issues, enforcement investigations and cases before the Regulatory Decisions Committee and Upper Tribunal.
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