REUTERS | Yves Herman

#Metoo in financial services

If you think #metoo conduct is the preserve of the entertainment sector, think again. It is prevalent in all sectors. That is why industry bodies and regulators in the likes of law, charities and construction have issued their members with guidance on dealing with sexually inappropriate conduct.

Financial services are not immune. Far from it. The Financial Conduct Authority (FCA) has made it clear that sexual harassment matters. The FCA’s interest in allegations and findings of sexual harassment or other sexual misconduct about individuals who work for the firms it regulates is part of the its broader focus on culture within the UK financial services industry.

Just as the law in the area of sexual misconduct isn’t new, neither is the FCA’s interest in it. Banks and building societies that are already subject to the FCA’s Senior Managers and Certification Regime (SMCR) have been taking a more holistic view of misconduct for some time, recognising that non-financial misconduct (including sexual harassment and other sexual misconduct) can have regulatory implications. What is new is that the issue has received considerably more public attention following the publication of a letter written by the Executive Director of Supervision at the FCA, Megan Butler, to the Women and Equalities Committee in September 2018, which has been followed by speeches on this topic made by other senior representatives of the FCA. These statements have emphasised the interest that the FCA is taking in relation to “poor personal misconduct, including allegations of sexual misconduct”.

It therefore comes as no surprise then that allegations of sexual misconduct are not only parked in HR’s forecourt. There is an additional layer of rules that need to be considered in conjunction with employment law. We find ourselves being asked with increasing regularity how allegations and findings of sexual harassment or other sexual misconduct impacts firms and individuals from a regulatory perspective too.

FCA-only authorised firms

While the banks, building societies and insurers are already living in the SMCR world, for FCA-only authorised entities the spotlight on individual accountability and overall culture will be further intensified following the implementation of SMCR on 9 December 2019. From this date, these firms will join those already subject to SMCR and be turned into mini-regulators with responsibility for assessing the fitness and propriety of their Senior Managers and Certified Persons, as well as assessing potential breaches of the FCA’s Code of Conduct for almost all employees as and when issues arise. The FCA has made it clear that firms’ responsibilities in relation to these matters will extend to allegations of sexual harassment or other sexual misconduct.

Even before transition at the end of the year for FCA-only authorised firms, allegations of sexual misconduct should be considered in the light of the fitness and propriety requirements that apply to approved persons and the FCA’s Statement of Principle and Code of Practice for Approved Persons (APER).

Fitness and propriety and personal characteristics

While in the past firms will have viewed allegations of sexual misconduct as “HR issues”, this isn’t the case now and it is certainly not the FCA’s view. Even though this type of misconduct may not at first glance appear as relevant to the FCA’s traditional areas of regulation in the same way as financial misconduct, it is misconduct which the FCA expects firms to consider from a regulatory perspective. For example, under SMCR, one of the factors to be considered when assessing the fitness and propriety of an individual is their “personal characteristics”. This has led to firms having to take a more holistic view of an individual’s suitability to perform a particular role, and including poor personal conduct into the mix. This can be a challenge for employers because while the FCA is clear that sexual misconduct should be considered from a fitness and propriety perspective, its guidance has been less clear on the action firms should take in relation to individuals who are potentially implicated in these situations. Developing a robust and consistent approach to assessing fitness and propriety in these situations is an issue with which banks and building societies are still grappling, almost three years after SMCR came into force for them.

As a general rule of thumb, we suggest applying the following principles:

  • The same allegation may be treated differently and have different consequences depending on the context, so it is important to assess allegations of sexual misconduct on a case by case basis and make an informed assessment based on the specific facts.
  • The role that an individual performs may be critical, particularly where the allegations involve an abuse of power by a senior individual over a more junior individual. Inappropriate sexual conduct in this context could well undermine supervisory responsibilities, thereby calling into question competence and capability and potentially integrity to carry out the role.
  • The more serious the misconduct, the more likely it will impact on fitness and propriety and, in particular, on an individual’s honesty and integrity.
  • Carefully record the outcome and thought processes involved in reaching any decision and the rationale for it.
  • Ensure that outcomes are fed into the appropriate channels for the purposes of regulatory references.

Breach of APER and the FCA’s Code of Conduct

From the starting point that sexual misconduct can fall within the scope of the Code of Conduct, the next question firms will need to answer is which (if any) of the Conduct Rules have potentially been breached. The FCA’s general and specific guidance relating to the Code of Conduct does not specifically refer to how conduct such as bullying, harassment and sexual misconduct should be interpreted under the Code of Conduct. However, the FCA’s guidance in this area is not intended to be exhaustive and, as a result, firms are left to come to their own views about which of the Conduct Rules may be engaged by sexual misconduct. The rules that are most likely to be relevant are Individual Conduct Rule 1 (acting with integrity) and Individual Conduct Rule 2 (acting with due skill, care and diligence).

For FCA-only authorised entities, the activities that fall within the scope of APER are narrower than the activities that will fall within the scope of the Code of Conduct from December 2019 onwards. APER applies to the performance by an approved person of their controlled functions or in relation to the carrying on of regulated activities, whereas the Code of Conduct applies to a much broader scope of conduct, including unregulated activities. In light of this narrower scope, it is less likely that sexual misconduct could fall within the scope of APER.

What is clear though is that the FCA expects firms to consider whether the conduct falls within the scope of APER or the Code of Conduct and, if not, to record the reasons why. While firms may conclude for a variety of reasons that some (but not necessarily all) allegations of sexual misconduct which concern events that took place outside of work fall outside the scope of APER or the Code of Conduct, it will be important for firms’ records to show how these decisions were reached and that a robust process was following in reaching them.

Linking tolerance of sexual harassment to a poor culture

We can now say categorically that the FCA is interested in allegations and findings of sexual misconduct, and that such misconduct (as well as other forms of non-financial misconduct) may form the basis for an adverse finding in relation to an individual’s fitness and propriety and potentially also their compliance with the Code of Conduct.

Addressing the Women and Equalities Committee in relation to their work on sexual harassment in the workplace on behalf of the FCA, Megan Butler felt confident in making a link between a culture where sexual harassment is tolerated and one “which would not encourage people to speak up and be heard, or to challenge decisions”. For the FCA, tolerance of sexual harassment is not only “a driver of poor culture” but also a barrier to ensuring that firms retain their best talent and make the best business decisions and risk decisions. These broader topics are also an increasing focus for the FCA, and we expect to hear more from the FCA on them over the coming months.

FCA toolkit to tackle sexual misconduct

  • Fitness and propriety. Sexual misconduct may have an adverse impact on an individual’s honesty, integrity and reputation for the purposes of assessing their fitness and propriety. Interestingly, findings of discrimination and harassment more generally may also have a similar impact on an individual’s fitness and propriety.
  • Code of Conduct. Sexual misconduct can amount to a breach of the FCA’s Code of Conduct in certain circumstances. If a breach of the Code of Conduct is established, that breach must be reported to the FCA (within seven days in the case of Senior Managers). Whether sexual misconduct can amount to a breach of APER is less clear-cut, given its narrower scope (only relevant to FCA-only authorised firms).
  • Regulatory references. If a disciplinary sanction has been imposed on an individual in relation to sexual misconduct (or if an individual resigns when allegations have been made) this is something that a firm is likely to need to include on any regulatory reference provided in respect of that individual, regardless of what (if any) decision is taken about that individual’s fitness and propriety or compliance with the Code of Conduct or APER (if applicable).
  • Whistleblowing. In addition to using a firm’s internal whistleblowing procedures to report allegations of sexual misconduct, the FCA has expressly invited individuals to raise such allegations directly with it through its whistleblowing procedure. The FCA said in Megan Butler’s letter that it would be particularly interested in any reports that indicated that a firm was “systematically mishandling allegations or incubating a culture of sexual harassment”. Of course, fully in scope firms also have obligations under the regulatory whistleblowing regime.

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