Head of Dispute Resolution Robin Henry and Associate Tamara Davis share their thoughts on the FCA’s view and actions regarding non-financial misconduct.

The Financial Conduct Authority (“FCA”) has long viewed non-financial misconduct as misconduct that falls within the scope of the regulatory framework. In May 2018, Megan Butler, the then FCA Executive Director of Supervision, gave evidence in the House of Commons as part of the Women and Equalities Committee’s inquiry into sexual harassment in the workplace[1] (the Committee’s report was subsequently published in December 2018[2]). Ms Butler spoke of the FCA’s well established requirement that those working in the financial services industry are to satisfy the “fit and proper” test[3]. It was confirmed that this test includes a “broader, cultural set of values”[4]because a business environment that accepts non-financial misconduct, such as sexual harassment, will not be an environment where the best business and risk decisions are made.

Despite these assurances, the FCA’s investigations into non-financial misconduct have been notably far and few between. Regulated firms are obligated to disclose any information which the regulator would reasonably expect to notice[5] and the FCA have confirmed that they receive, per quarter, an average of six reports from firms regarding non-financial misconduct and three whistleblowing disclosures relating to allegations of sexual misconduct[6]. However, a Freedom of Information request made in November 2020 found that only 6 investigations had been opened by the FCA into non-financial misconduct between 2018 and 2020 (inclusive)[7]. Similarly, only seven individuals have been publicly prohibited[8] from working in the financial industry following findings that they did not satisfy the fit and proper test because of their non-financial misconduct[9]. These statistics may come as a surprise against the backdrop of the #MeToo movement and the finding that 54% of people have experienced sexual harassment and other types of discrimination in the workplace alone[10].

The FCA’s approach to non-financial misconduct has been under recent scrutiny following allegations brought by thirteen women that they were sexually harassed by Mr Crispin Odey (eight said he had sexually assaulted them)[11]. When an internal investigation was opened at OAM, Mr Odey allegedly responded by dismissing the entire Executive Committee to avoid a disciplinary hearing. The Treasury Committee subsequently sent a letter to the FCA on 14 June 2023[12] requesting further information about the steps taken by the regulator against Mr Odey, as well as the FCA’s wider approach to non-financial misconduct. Nikhil Rathi, the FCA’s chief executive, confirmed that the FCA has been investigating Mr Odey since 2021[13]. Their inquiry focuses on whether he is a “fit and proper person” to work in financial services, and whether there has been a failure to comply with the FCA’s conduct rules on integrity, due skill, care, and diligence.

Although the FCA’s investigation is welcome, it may face judicial challenge if it goes beyond its powers in seeking to make a prohibition order against Mr Odey. The fitness and proprietary test is not based upon the misconduct alone, but factors including the person’s honesty, integrity and reputation, competence and capability and financial soundness[14]. As a financial regulator, the FCA must operate within the objectives that they are set by the government, namely consumer protection, market integrity and effective competition[15]. In essence, the question is whether the misconduct impedes on the individual’s ability to perform their regulated role. This was highlighted in the recent case of Jon Frensham v The Financial Conduct Authority [2021] UKUT 0222 (TCC). In 2017 Mr Frensham was convicted of child sexual grooming offences following which he was prohibited by the FCA from performing any regulated activities. Mr Frensham appealed this decision, arguing the ‘fit and proper’ test had been wrongly applied because, inter alia, his criminal offences did not relate to his regulated activity and his conviction was not for an offence of dishonesty. The Upper Tribunal Tax and Chancery Chamber held the FCA had been justified in making a prohibition order against Mr Frensham, but not by reason of his conviction alone[16]. It was how he had dealt with the consequences, in particular his failure to be open and cooperative with the FCA by failing to report his conviction, that meant the prohibition should be upheld. Mr Rathi, in his oral evidence given to the Treasury committee on 19 July 2023[17], pointed out that the FCA had been particularly “disappointed” with this element of the judgment. He requested that Parliament provide further guidance about the nature of offences that should prevent people from being allowed to work in the regulated sectors. It was also confirmed that the FCA, in conjunction with the Bank of England, will be providing further guidance in September on their approach to non-financial misconduct.

Nonetheless, despite the limitations to the FCA’s jurisdiction, there is clearly a growing and purposeful movement within the FCA to be seen to clamp down on non-financial misconduct. Whatever the outcome of the investigation into Mr Odey, regulated firms and individuals should be conscious of their obligations under the FCA handbook; both professionally and privately. It is therefore crucial that firms cultivate a psychologically safe working environment that encourages employees to ‘speak out’ through internal grievance and whistleblowing policies. Misconduct, whether financial or non-financial, should be reported to the FCA without delay and Collyer Bristow’s Banking and Financial Disputes and  Employment teams can provide further advice and information where needed.

Sources:
[1] Oral evidence – Sexual harassment in the workplace – 23 May 2018 (parliament.uk)
[2] House of Commons Women and Equalities Committee, Sexual Harassment in the Workplace, Fifth Report of Session 2017-2019, Report, together with formal minutes relating to the report. Published on 25 July 2018 by authority of the House of Commons
[3] FCA Handbook, FIT Fit and Proper Test for Employees and Senior Personnel
[4] Oral evidence – Sexual harassment in the workplace – 23 May 2018 (parliament.uk)
[5] Principle 11 of the FCA Handbook
[6] Letter from Nikil Rathi to Harriett Baldwin MP dated 03 July 2023
[7] Information on enforcement investigations into non-financial misconduct – December 2020 | FCA
[8] Under section 56 FSMA 2000, the FCA has the power to prohibit individuals who are not fit and proper from carrying out functions in relation to regulated activities carried out by films.
[9] Reports about sexual and non-financial misconduct made to the FCA | FCA; Individual Prohibitions (fca.org.uk); Letter from Nikil Rathi to Harriett Baldwin MP dated 03 July 2023
[10] Government Equalities Office, 2020 Sexual Harassment Survey
[11] Financial Times, ‘How Crispin Odey evaded sexual assault allgations for decades’, 08 June 2023
[12] Letter from Harriett Baldwin MP to Nikhil Rathi dated 14 June 2023
[13] Letter from Nikil Rathi to Harriett Baldwin MP dated 03 July 2023
[14] FIT 1.3.1G
[15] Oral evidence, Treasury Committee, 19 July 2023
[16] Paragraph 174; Jon Frensham v The Financial Conduct Authority [2021] UKUT 0222 (TCC).
[17] Oral evidence, Treasury Committee, 19 July 2023