City bosses are set for fresh scrutiny over the conduct of their staff as the financial regulator extends a clampdown on non-financial misconduct issues like bullying and harassment.
After years of consultation, surveys and industry feedback, the Financial Conduct Authority’s (FCA) new rules on non-financial misconduct in non-banking firms take effect on Tuesday for around 37,000 non-bank firms.
“The regime makes clear that issues such as bullying, harassment, discrimination and other serious inappropriate conduct cannot be treated purely as HR matters where they may have regulatory relevance,” said Amy Bird, partner at Clifford Chance.
The near two-year journey from the initial proposals to the final rules has involved significant industry push-back and major concessions by the City watchdog, but it has also pushed firms to change internal procedures in preparation for the rule changes.
Non-financial misconduct is defined as any unwanted behaviour that makes a colleague feel unsafe, uncomfortable, or disrespected, or involves violence. This is similar to the definition of harassment in the Equality Act 2010, but for non-financial misconduct, the behaviour does not have to be linked to factors such as age, race, or sex.
Culture under the microscope
“The regulator is signalling that poor culture is capable of creating regulatory harm even where there is no direct financial misconduct,” Kyle Phillips, partner at law firm Howard Kennedy, said.
The conduct of City executives has been in the spotlight after regulatory rulings against disgraced financier Crispin Odey and former Barclays chief executive Jes Staley prompted calls for firmer rules around misconduct.
In March, it was also revealed that reports of conduct breaches to the FCA had increased substantially. At the time, breaches of the “conduct rules” included failure to act with integrity, due skill, care and diligence, as well as shortcomings in customer treatment and cooperation with regulators.
What should the City expect to see?
Lawyers have pointed out that the new rules are not retrospective, and therefore, the watchdog won’t be launching action in conduct rule breach decisions or historical fitness and propriety assessments.
However, Phillips explained that while it doesn’t expect the watchdog to launch enforcement cases shortly after implementation, firms should still expect scrutiny from day one.
“The more important question is likely to be whether a firm can demonstrate that it took reasonable steps to prepare, train staff, update policies, and has a credible framework for identifying and addressing incidents,” he said.
Lawyers warned that City firms must unite their HR, legal, compliance, and senior management teams to address the rules.
Eleanor Matthews, a senior associate at Clifford Chance, said: “The FCA’s immediate focus is likely to be on supervision rather than early enforcement, including testing whether firms’ policy, governance and escalation arrangements work in practice.”
As a result, policies need to be updated and preferably operate as part of a joined-up framework, she said, adding that bosses will need to assess whether they need to investigate allegations when conduct occurs in an individual’s private life.
Shaun Hurst, principal regulatory adviser at Smarsh, said firms should also make it clear to staff that ‘work-related’ doesn’t mean office hours.
“Conduct at a firm social, a client dinner or an industry conference can fall within scope where the link to the role is there, which is a wider net than many firms assume. What it doesn’t mean is monitoring people’s private lives, and the FCA has been clear that firms aren’t expected to do that,” he said.