Out-Law / Your Daily Need-To-Know
Plans by the UK’s two financial regulators to consider non-financial misconduct such as sexual harassment as grounds for regulatory action could pose difficult questions for firms, an expert has said.
The Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) have published proposals for new diversity and inclusion requirements for financial firms that they hope will result in more action being taken against people who engage in bullying and sexual harassment and will “improve the safety and soundness of firms”.
Senior roles at regulated financial firms can only be held by people who pass a ‘fit and proper person’ test. The regulator’s proposals suggest including non-financial misconduct as a consideration in relation to this.
“We have taken a lead among regulators in taking a clear stance that non-financial misconduct, such as sexual harassment, is misconduct for regulatory purposes. We’re strengthening our expectations on how the firms we regulate consider such misconduct when deciding whether someone is fit and proper to work within the industry,” said FCA chief executive Nikhil Rathi.
Employment law expert Anne Sammon of Pinsent Masons said: “This addition is likely to be helpful for firms in that it is now clear that information that they hold about an employee or former employee relating to behaviour such as bullying or harassment should in some circumstances be included in a regulatory reference. The challenge for firms, though, will be in determining whether an issue is serious enough to be included in a reference, particularly bearing in mind the potential serious consequences for the subject of the reference.”
Financial regulation specialist Hannah Ross said: “The focus on non-financial misconduct is a significant and positive change for the financial services industry, but some may see this as an expansion of the FCA’s perimeter to non-financial matters through the back door.”
“The regulator’s approach is consistent with its regulatory objectives and its 2022-2025 strategy and, although the proposals may at first appear onerous for firms, they support and overlap with Consumer Duty implementation, as they should assist firms to support good consumer outcomes,” she said. “Firms should take note of the regulator’s comments that firms with a more diverse and inclusive talent pool will be better placed to understand and respond to the needs of a broader range of customers.”
The new guidance makes it clear that regulatory action can be taken based on behaviour outside of the workplace. “Firms have struggled, when challenged by individuals or their representatives, to explain how these issues fall within the scope of the FCA’s rules, so this additional guidance is likely to be very useful for firms when dealing with these issues,” said Sammon.
The proposals expand the scope of the FCA’s Code of Conduct (COCON) so that it covers serious instances of bullying, harassment and similar behaviour towards colleagues and contractors, and clarifies which conduct rule would be breached by bullying/harassment.
Sammon said that this clears up some confusion about exactly which rules apply to some kinds of behaviour. “The FCA also proposes to provide some additional guidance on when conduct is within scope of COCON, which will include factors such as whether the conduct: occurs on the firm’s premises; when working on the firm’s business; involves someone with whom the individual has dealt with on behalf of the firm, involved clients or someone the individual dealt with on behalf of the firm,” she said.
The proposals include requiring firms to act on non-financial misconduct if they are to meet regulators’ Threshold Conditions (COND). Not meeting those conditions means that they cannot operate in the financial services market.
“The FCA’s proposed changes here include integrating the non-financial misconduct into the suitability criteria for firms to operate in the financial sector. Non-financial misconduct here is set out as violence, sexual offences, and offences relating to a person’s or a group’s demographic characteristics such as racially motivated or aggravated offences, or discriminatory practices,” said Ross.
Some firms face stricter regulation. Those which are regulated by the FCA and the PRA; those that are subject to the Capital Requirements Regulation and the Solvency II insurance regulations,irrespective of size, and those with 251 or more employees must develop and publish a diversity and inclusion (D&I) strategy.
Strategies must set D&I objectives and goals; detail a plan for meeting them and measuring progress; and firms must ensure there is adequate knowledge of this strategy amongst staff.
Firms that are not Limited Scope firms and have more than 251 employees must set public targets to improve their diversity and make annual progress against them. But the FCA will not decide what those targets should be or what areas of diversity they should address.
Firms will have to report to the FCA each year on progress in relation to age; sex or gender; disability; ethnicity; religion, and sexual orientation.
“The draft rules place take responsibility for implementation with firms’ boards. The FCA is asking firms’ senior management to do the right thing and proactively drive forward D&I initiatives,” said Ross.
PRA Chief Executive Sam Woods said: “Diversity and inclusion play an important role in guarding against groupthink within firms. Firms in which a broad range of perspectives is welcomed and encouraged will manage their risks better, advancing the PRA’s objective of safety and soundness. Stronger diversity and inclusiveness should also make firms more competitive by enabling them to attract a wider pool of talent.”
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