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Analysis & opinionOctober 14 2021

UK regulators’ muddled approach to non-financial misconduct

The FCA has over-reached on a number of occasions and has then had to backtrack.
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UK regulators’ muddled approach to non-financial misconduct
chris finney

It’s been three and a half years since the UK’s financial regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), told a House of Commons Women and Equalities Committee that they would use the Senior Managers and Certification Regime (SMCR) to drive discrimination, bullying and sexual harassment out of the banking industry.

In that time, the regulators have had plenty to say about the things they would do, and the things they wanted banks to do, concerning anyone who engaged in non-financial misconduct, as well as those who tolerated it. Banks have responded positively to these calls. But were they right to do so?

Between the introduction of the SMCR in March 2016 and September 30, 2020 (the end date of a recent freedom of information request), the FCA opened 37 SMCR-related investigations against individuals, but only five mentioned non-financial misconduct.

In three of the five cases, the FCA found that a man lacked integrity because he had been convicted of a sexual offence and banned him from working in the financial services industry. These bans might have been wrong in law; they were probably also pointless. (Banks are required to carry out background checks, and a check on these men would have revealed their convictions.)

In the other two cases, the FCA imposed a fine. The first was imposed on Jes Staley, chief executive of Barclays, for failing to act with due skill, care and diligence in the way he responded to a whistleblower’s letter. The second was imposed on Stuart Forsyth, who ran a boat insurance company, for acting in a way that (according to the regulators) showed he lacked integrity. Mr Forsyth referred his case to the upper tribunal and, when it handed down its judgment on July 6, 2021, it rejected the regulators’ allegations. It also criticised the “serious failings” of the regulators, failings that “may have been caused by a basic lack of competence” at the FCA, and a “lack of systems” at the PRA.

A changing landscape

On July 7, 2021, the regulators published their discussion paper on diversity and inclusion in the financial sector. For three and a half years, they wanted us to believe that they would take action against those who engaged in non-financial misconduct and those tolerated it; and they wanted banks to do the same. However, in the discussion paper, they described themselves as merely “exploring” whether non-financial misconduct “could affect” the assessment of an individual’s fitness and propriety “in the future”, before adding that they “could” develop guidance on the point because it might be useful to do so.

The regulators sometimes get it wrong when they act

On August 31, 2021, the upper tribunal handed down its judgment in the on a case involving financial advisor Jon Frensham. Mr Frensham was on bail pending the investigation of an alleged offence, when he committed the sexual offence for which he was subsequently convicted.

From the FCA’s perspective, a conviction for a sexual offence seemed to be enough to show that Mr Frensham lacked integrity, and that he could and should be banned from working in an authorised firm. But the tribunal disagreed. It was true that Mr Frensham lacked integrity, however that was not because he had been convicted of an offence. It was because he did not quickly and transparently enough tell the FCA that, at one point, he was held on remand, which made it difficult or impossible for him to do his job.

What can banks learn?

First, the regulators have over-reached themselves too often in this area, and they have been appropriately criticised for doing so.

Second, banks that followed the regulators’ lead too keenly might have avoided the risk of regulatory sanction (by acting in a way that showed they would not tolerate non-financial misconduct), and inadvertently generated the risk of employment law claims (by finding that those who committed offences lacked integrity, when the Frensham decision shows that is a more difficult conclusion to reach lawfully, than the regulators had previously suggested).

Third, the regulators sometimes get it wrong when they act and when they encourage others to act in a certain way. The Forsyth judgment seems to suggest that Mr Forsyth lost his job because the regulators made serious allegations against him – although the allegations did not survive the tribunal process. And the Frensham judgment seems to suggest that banning a person from working in an authorised firm is unlikely to be lawful, if the ban is merely based on the assertion that those who commit crimes lack integrity, especially when (as in that case) the crime had nothing to do with Mr Frensham’s work, or workplace, and nothing to do with his status as an FCA-approved individual.

In some cases, it is therefore worth challenging the regulators, even if one would usually be inclined not to do so. It can also be worth choosing not to act, even if one’s instinct is that “something must be done”, until the tribunal process has finished, because the tribunal process can fundamentally change one’s views about the thing that “must be done”.

And finally, for the human resources, legal and compliance professionals who have been trying to persuade a bank to do the right thing when non-financial misconduct has occurred, and those who have suffered as a result of that misconduct, the regulators have let you down. Some will use this as an excuse not to act in the future, and now it will be even harder to persuade them to do so.

The regulators have also let down those who lost their jobs because the regulators made false allegations against them, as well as those who lost their jobs because the regulators previously insisted that a lack of integrity in one’s private life can be enough to show a lack of integrity in one’s professional life too.

Chris Finney is a partner at law firm Fox Williams.

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