How does the FCA expect a firm to go about investigating allegations of NFM? If someone’s non-financial misconduct breaches the Conduct Rules, does that mean they need to be dismissed?

These questions arise frequently in the HR and Compliance departments of FCA and PRA regulated businesses. Perhaps that is because, despite clearly articulating its expectations that regulated firms rid themselves of bad apples, the FCA has avoided commenting on how they should go about doing so.

That may be wise. After all, it would be an Employment Tribunal, not the regulators, which would determine whether an employer carried out a ‘reasonable’ investigation and whether a decision to dismiss falls within the band of reasonable responses. If the regulators were to require investigations to be conducted in a certain way, that would either ‘gold plate’ or cut across a firm’s legal obligations. Whilst the band of reasonable responses might seem like a rather nebulous concept, it has been the subject of detailed scrutiny in decades of Employment Tribunal decisions and, in most cases, it is now reasonably clear where its boundaries lie. The same cannot be said of the types of non-financial misconduct that will/will not breach the Conduct Rules. The proposed new rules around NFM do not (as they stand) affect ordinary unfair dismissal law at all, nor do they require in terms that an employer must dismiss an employee who commits particularly serious breaches of those Rules. They don’t need to. Once the employer has concluded that the conduct in question makes the employee not fit and proper, it has no option but to stop the employee performing any regulated role, and so in most cases will be obliged to dismiss on that basis.

So, from an employment lawyer’s perspective, the absence of regulation on these matters is welcome. However, that does not answer the question about whether and how the FCA involving itself more expressly in NFM affects how employers should go about investigating it and what the appropriate sanction might be.

Investigating

Turning first to the question of how it should be investigated:

When investigating conduct that may amount to NFM, the purpose of the investigation will be twofold: Firstly, to identify whether there was misconduct from an internal HR/employment law point of view; and secondly to establish whether there has been a regulatory breach.

The Acas Code and a firm’s own internal processes already define what a fair and reasonable investigation looks like for internal HR/employment law purposes. The good news is that the FCA does not propose to interfere with these – burdens of proof and definitions of reasonableness will remain the same. So, what, if anything, about an NFM investigation should change in light of the FCA’s proposals?

1. Firstly, the rigour of an investigation may need to be enhanced. The effect of upholding allegations of NFM could have potentially far-reaching consequences – career-ending consequences. They may lead to an individual being barred from working in the financial services profession or being rendered effectively unemployable as a result of a negative regulatory reference. With the consequences being so severe, Employment Tribunals presiding over claims of unfair dismissal will expect the investigation to have been particularly rigorous. Historically, an employer would want to ensure that its investigation was robust enough to repel challenge by the employee dismissed on the back of it – he would never argue with one conducted so feebly that a decision to dismiss was not made when it could or should have been. But now your investigations may come under scrutiny from both ends – the employee if harmful findings are made against him and from the FCA if they are not.
2. There may be increased pressure from employees to allow legal representation at internal investigation and disciplinary meetings, following case law from the medical and education sectors where certain sorts of conduct findings may affect one’s status with a necessary professional body and so have much greater potential consequences than “merely” losing one’s job. For disciplinary meetings in particular, our general view would be that the point is not worth resisting.
3. Next, firms subject to the Whistleblowing section of the FCA’s Handbook will be subject to some additional procedural requirements when investigating allegations of NFM made by a whistleblower. Specifically, firms must protect the confidentiality of whistleblowers and, when appropriate, provide feedback to whistleblowers about the concerns they have raised. As mentioned in an earlier blog post, given the FCA’s broad definition of the term “whistleblower”, these requirements apply in a broader range of circumstances than you might think. If I make a complaint about what I believe to be NFM on the part of a regulated employee or Senior Manager and nothing bad seems to happen to him as a result, I may well make a notification to the FCA, and it may then want to review the employer’s investigation process and the evidence it received. That is a good practical reason to keep your whistleblowers happy, at least within the bounds of your obligations of confidentiality to the person accused. Certainly, firms will want the FCA to hear of these matters from them first, not from disillusioned individuals within their staff.
4. Finally, the increased likelihood of serious implications for those found to have committed NFM may increase firms’ desire to be seen to have these matters handled by an expert and by someone who is truly impartial. The #metoo and Black Lives Matter movements resulted in an uptick in clients outsourcing the investigation of allegations of sexual harassment and racism to HR professionals and Employment lawyers. Those investigations have become a large and growing part of this firm’s practice. In its consultation paper, the PRA sets out its expectation that allegations of NFM are “assessed objectively and independently by an appropriately qualified person”. We assume here that “independently” means done by someone not previously involved in the matter, not necessarily someone external. What kind of qualifications it expects and whether they need to extend beyond the average internal training session on investigations remains to be seen. However, this comment is reflective of a general trend and, given how the FCA’s proposals amplify the potential regulatory implications for a firm that does not identify and deal appropriately with NFM, it is a trend that we expect to see expand in the financial services sector.

Sanctions

Turning now to the question of what the appropriate sanction is for NFM:

It would be absurd for there to be a single ‘appropriate’ sanction for NFM, given it covers such a broad range of conduct. That was, perhaps, one factor playing in the FCA’s mind when it decided to avoid commenting. So, as with the investigation itself, HR professionals should look to their normal policies and past practice for guidance. If dismissal is contemplated then it should be employment law (specifically, whether dismissal would fall within the old band of reasonable responses test) that guides the decision whether or not to proceed.

However, the FCA’s position on these matters is of some relevance:

1. One potential sanction, namely the reduction or recovering of an individual’s remuneration, is often available to regulated firms as a direct consequence of the FCA’s regulation of this industry. One of the aims of the FCA’s remuneration codes is to discourage misconduct since that can lead to poor consumer outcomes. So, often misconduct will result in a regulated firm awarding a lower bonus or operating malus or clawback provisions. In some cases (when coupled with a more traditional sanction such as a written warning) that might be considered sufficient punishment.
2. When employees have been warned that certain conduct would breach regulatory standards, the sanction for then committing such conduct could be more severe. Regulated firms are expected to train staff on the Conduct Rules and how those rules apply to them – given that NFM is proposed to be expressly included within these rules, this training should cover NFM. This makes it all the more likely that where an individual perpetrates serious NFM, a dismissal would more readily fall within the band of reasonable responses and therefore be a fair reason for dismissal.
3. Even if a dismissal would not be within the band of reasonable responses based on the conduct alone, as noted above, if the regulatory consequences are that the individual is found no longer fit and proper to perform their regulated functions, then a dismissal for “some other substantial reason” (namely that the individual is not allowed to perform their job) very well might be. Employers will need to keep a watchful eye on fitness and propriety decisions – it will be at least as damaging to take an unjustifiably serious view as to treat a complaint too lightly. This does beg a key question on the interplay between regulation and employment law – can you be found not fit and proper for NFM which would not justify a substantively fair conduct dismissal? For the most part, we think that the answer to this is or ought to be no. If the employer does not think that the conduct in question justifies dismissal, it will be very hard for it to say at the same time that it is so serious as to warrant deeming the employee unfit to practise in the FS sector.

If you need help investigating alleged non-financial misconduct or you want to discuss what sanction you might propose, please get in touch.

The fourth video to accompany this series is available here.

Resource Centre Our dedicated Financial Services and Employment Resources webpage will be updated on a regular basis to upload our video series and provide additional useful and supplementary resources.

If you missed them, read Part 1, Part 2, Part 3 and Part 4 of this series.

Ryan Cumiskey also contributed to this article.