The FCA has made technical but important changes to the chapter of its Handbook governing the application of the Code of Conduct (COCON).
- New guidance (at COCON 1.3) has been introduced to make clear that the Code of Conduct does not cover a person’s private or personal life. Factors are provided to assist firms with the Code’s application, particularly in some common scenarios where boundaries between work and social life may become blurred.
- For example, the guidance indicates that the FCA considers the Code would not normally apply when someone is commuting to work but would apply to individuals travelling together to a business meeting in which they will represent their firm.
- The guidance also makes clear, however, that conduct which is outside the scope of the Code may still be relevant to an assessment of fitness and propriety (see below).
- New guidance has also been introduced for firms with mixed businesses, e.g. a company with a regulated financial services business alongside its main business. Real care is needed here as the changes are likely to have practical importance for a wide range of companies. The Handbook had already required significant judgement in this area, and following the changes, there is more guidance to assist. In substance, however, the Code may apply more widely within such firms than their managers might expect.
Further guidance on how non-financial misconduct can breach the FCA’s Code of Conduct
The FCA has introduced into the Code (at COCON 4.3) materially more guidance about how it considers existing conduct rules could be breached by non-financial misconduct, particularly by behaviours constituting bullying or harassment.
Existing Code rules require individuals within scope to behave with integrity, and to exercise due skill, care and diligence. The FCA has bolstered its guidance about how these rules could be breached by non-financial misconduct. The new guidance makes clear (among other matters) that a person may breach those rules by subjecting another member of the workforce to harassment, and that a firm’s manager must act reasonably to prevent harassment, for example by intervening to stop the relevant behaviour where they reasonably know of it and/or by taking complaints about harassment seriously.
A new section of the guidance has been added to deal specifically with harassment in a work context. Helpfully, the guidance emphasises that the Code only covers “serious” misconduct, with a number of indicative factors given, including whether the conduct is repeated or part of a pattern, its duration, the impact on the person on the receiving end and the seniority of the perpetrator.
The FCA has reinforced guidance (in the FIT chapter of its Handbook) that applies when the regulator and firms are assessing fitness and propriety of individuals for regulated roles. Indicators that a person is not fit and proper include serious breaches of the requirements of the regulatory system, involving dishonesty, breach of trust, or violence. Other factors that a firm should take into account include, for example, how recent any breach was, whether it was repeated, evidence of rehabilitation or remorse, and past disciplinary record.
The guidance makes clear, however, that a person’s behaviour outside of work may still be relevant to the assessment of fitness and propriety (even where it would not itself be a breach of the Code). The FCA makes clear that conduct which is inconsistent with its statutory objectives or is of a type that would damage public confidence, will be relevant.
In perhaps the most controversial parts of the new guidance, the FCA makes clear that conduct which takes place in a person’s private or personal life, and shows there is a material (and not an ‘assumed’, ‘remote’ or ‘speculative’) risk that the person will breach the standards and requirements of the regulatory system, may show that a person is not fit and proper.
Examples given include dishonesty, violence and sexual misconduct committed in a person’s private life where there is a risk of the person engaging in similar conduct at work, e.g. towards customers or other employees. The new guidance further indicates that some forms of misconduct in a person’s private life will still be relevant even if there is little risk of it being repeated at work, including disregard for ethical or legal obligations, and the abuse of a position of trust.
The guidance is clear that firms are not, however, under an obligation to monitor the private lives of staff or investigate trivial or implausible allegations. It also makes clear that when considering criminal offences committed outside of work, particular consideration should be given to offences of dishonesty, fraud, financial crime, violence, sexual offences and racially motivated or aggravated offences.
We offer the following top tips to HR and employment teams implementing and working with the new changes.
- When faced with allegations of non-financial misconduct, it is extremely important for HR teams, employment lawyers and regulatory lawyers to work alongside one another. Views taken about breaches of regulatory requirements can have significant consequences not only for employment proceedings, but also for regulatory reporting, for an individual’s career in financial services, and for the regulated firm they work for. Co-ordinated decision making is essential.
- Not every issue that can give rise to disciplinary action in employment law will also be a breach of the Code of Conduct or negatively impact a person’s fitness and propriety. These issues are clearly linked, but each needs to be looked at in its own right.
- The concepts of (i) fitness and propriety to carry on a regulated role; and (ii) breaches of the FCA Code of Conduct, are not the same, and need to be assessed separately. It is now clearer than before that misconduct in a person’s private life (wholly outside a work context) is unlikely to breach the FCA’s Code of Conduct but may still be relevant to a fitness and propriety assessment.
- Decisions that an individual breached the Code or is not fit and proper to discharge a role because of non-financial misconduct need to be analysed thoroughly and backed by evidence.
- Firms faced with allegations that an individual has committed non-financial misconduct will often need to structure any investigations carefully bearing in mind legal privilege and the potential for later proceedings.
- Despite the FCA’s updated guidance, the NFM regime still requires firms to apply considerable judgement, for example when assessing the application of the Code to social occasions organised by managers, or to the use of personal social media accounts by staff. Thorough analysis will remain essential.
