Culture and purpose: banning individuals for non-financial misconduct
How far should the regulator go when banning people from working in finance because of criminal acts? Oliver Pegden, Amy Bird and Eleanor Matthew from Clifford Chance look at the issues.
In September 2018, the Women and Equalities Committee published its report on sexual harassment in the workplace.
In response, Megan Butler, then the FCA’s Executive Director of Supervision (Investment, Wholesale and Specialists Division) wrote a well-publicised letter explaining the three main bases on which the FCA sees sexual misconduct as falling within the scope of the financial services regulatory framework: through supervision of workplace culture; through fitness and propriety assessments; and, potentially, through enforcement of the Conduct Rules themselves. The letter suggested how the FCA draws a link between non-financial misconduct, culture, psychological safety and the FCA’s statutory objectives.
In a speech shortly afterwards, in December 2018, Christopher Woolard, then Executive Director of Strategy and Competition at the Financial Conduct Authority (FCA), warned the industry that "non-financial misconduct is misconduct, plain and simple".
In 2020, announcing three recent FCA prohibitions against individuals, Mark Steward, Executive Director of Enforcement and Market Oversight, said:
"The FCA expects high standards of character, probity and fitness and properness from those who operate in the financial services industry, and will take action to ensure these standards are maintained."
At the same time, however, in SRA v Beckwith [2020] EWHC 3231 (Admin) the High Court has sounded a note of caution to all professional services regulators against being "dogmatic" and treating popular outcry as "proof that a particular set of events gives rise to any matter falling within a regulator's remit."
Integrity and reputation: fresh insight
The non-exhaustive list of examples of conduct in COCON that may constitute a breach of the requirement to act with integrity does not expressly include non-financial misconduct, and the factors listed in FIT for assessing integrity focus on financial matters. There are few cases addressing the meaning of integrity in relation to non-financial misconduct.
On 5 November 2020, the FCA announced that it had prohibited Russell Jameson, Mark Horsey and Frank Cochran from working in financial services on the basis of convictions for sexual offences (the three cases are unrelated) on the basis of a lack of integrity and reputation.
All three had carried out financial advisory work, and in criminal proceedings were given custodial sentences and required to sign the sex offenders register. Jameson was convicted of criminal offences involving the making, possession and distribution of indecent images of children. Horsey was convicted of voyeurism. Cochran was convicted of sexual assault and engaging in controlling and coercive behaviour.
In issuing the prohibitions, the FCA referenced comments by the sentencing judges, including that Jameson had committed an “outrageous abuse of trust” because he had superimposed the faces of individuals known to him onto pornographic material; that Horsey's offences involved “substantial and significant planning”, including the careful positioning of mirrors and a ladder; and that Cochran's offending involved a “breach of trust” and an “abuse of power”.
Trust and abuse of power
These references provide some limited insight into behaviours the FCA consider relevant in assessing whether cases fall within their remit (and which will therefore assist firms grappling with how to deal with less clear-cut cases): trust and abuse of power are critical themes for the FCA.
Evidently these were cases involving criminal convictions for serious sexual offences and have been regarded by commentators as straightforward.
However, it is clear that the regulator takes the view that there will also be less clear-cut cases in which an individual could lack the necessary integrity and/or reputation, even without a criminal conviction, where there is other evidence of non-financial misconduct.
What sort of conduct would fall within scope and what sort of evidence would be required? There are no financial services cases or guidance to address this question beyond the guidance given by the regulators in the speeches and letters described above and the limited guidance set out in FIT and the Enforcement Guide, neither of which refers expressly to sexual misconduct.
That leaves firms facing difficulties in how to treat a wide range of conduct, from alleged non-consensual sexual behaviour towards colleagues which does not result in a criminal conviction, through to allegations relating to sexual conduct outside work potentially extending to allegations of abusive behaviour in the context of divorce proceedings or even, perhaps, allegations of marital infidelity.
In Beckwith, the Administrative Court considered the meaning of integrity and reputation in the context of the regulatory framework applicable to solicitors, adopting reasoning that will be equally applicable to financial services.
Integrity
As regards integrity (in the context of the obligation on solicitors to act with integrity) the Court approved the definition of integrity offered in Solicitors Regulation Authority v Wingate [2018] 1 WLR 3969 in which the Court had, in turn, cited Hoodless with approval. The Court drew from Wingate the principle that “in the context of the regulation of a profession there is an association between the notion of having integrity and adherence to the ethical standards of the profession.”
The Court further held that “there is no free-standing legal notion of integrity in the manner of the received standard of dishonesty”. Instead, the standard of conduct required by the obligation to act with integrity “must be drawn from and informed by appropriate construction of the contents of the relevant rules”, so as to facilitate a “principled approach to the important point raised by the circumstances of this appeal: the extent to which it is legitimate for professional regulation to reach into personal lives of those who are regulated.”
Applying this approach in the context of financial services means interpreting "integrity" and "reputation" in the context of the regulators' objectives and the provisions of the Handbook.
Each case will need to be considered on its facts but what is clear is that lack of integrity and reputation in this context does not mean failure to adhere to prevailing moral or ethical standards at large (to the extent that these can be determined), but failure to meet the standards of the profession, bearing in mind that the scope of the regulatory framework, as the Court said in Beckwith, “cannot extend beyond what is necessary to regulate professional conduct and fitness to practise and maintain discipline within the profession.”
The regulator's perspective is that if non-financial misconduct makes staff feel psychologically unsafe, that may prevent staff from working effectively more broadly, including, for example, by inhibiting staff from speaking up/offering an appropriate upward challenge. More broadly, it considers that tolerance of non-financial misconduct may serve to harm diversity (which, in turn, may hinder both innovation and firms’ ability to meet the needs of consumers from diverse segments of society) and damage society’s view of the financial services sector.
The effect of this perspective may be to draw within the regulator’s remit conduct and behaviours that might otherwise appear to lack sufficient nexus with the workplace to be relevant to the regulatory regime.
FCA expectations
Presently, as a result of the Covid-19 pandemic, many firms have shifted to homeworking, and this change looks likely to persist to some degree after the pandemic is over. This may not mean that the FCA’s focus on non-financial misconduct will abate. The regulator will expect firms to take action to detect and prevent non-financial misconduct which may occur remotely or outside the office.
In the wake of Beckwith, firms and the regulators may be more cautious about treating non-financial misconduct as amounting to a breach of the Conduct Rules or as relevant to fitness and propriety.
But the regulator also expects firms to have appropriate systems and controls, including to evaluate whether or not non-financial misconduct impacts on the Conduct Rules or fitness and propriety. In other words, there is an obligation on firms to be considering issues relating to non-financial misconduct in the right way, where it has the potential to fall within the regulator's remit, regardless of whether it ultimately does. Failures in such systems and controls were always likely to be a greater area of risk for firms than the underlying misconduct itself, and that has not changed.