In the world of finance, the winds of change are blowing as regulatory bodies, the Financial Conduct Authority (FCA) and the UK Prudential Regulation Authority (PRA), have recently issued Consultation Papers proposing a significant shift in the rules governing diversity, inclusion, and non-financial misconduct within the financial services sector. These papers are a response to concerns regarding the evaluation of individuals' fitness and propriety and the breach of the FCA's Conduct Rules.
Evolution in Regulations
In 2021, a joint Discussion Paper issued by the FCA and the PRA laid the groundwork for this shift. Now, in a bid to create a more inclusive and diverse financial environment, both regulators have proposed new rules and guidelines. The FCA's Consultation Paper particularly stands out for its not only formalizing diversity and inclusion protocols but also for its propositions regarding non-financial misconduct.
The absence of clear guidance has posed a challenge for firms assessing individuals’ fitness and propriety, especially when it comes to determining breaches in the FCA's Conduct Rules. This lack of direction is being targeted by the newly proposed rules and guidelines. They outline a more comprehensive approach to evaluating non-financial misconduct and establish that it's mainly relevant if it occurs within a workplace or business context.
A Glimpse into the Proposals
The proposed rules encompass various measures. For instance, they include new reporting obligations and the requirement for larger firms to set and report on diversity and inclusion targets. These rules are expected to be finalized in 2024 following a thorough consideration of consultation feedback, coming into effect a year later.
One significant aspect of the proposal is the explicit coverage of non-financial misconduct within the purview of the firm’s regulated activities. The revised scope includes behaviours like bullying, harassment (including sexual harassment), and similar conduct towards employees, within the firm or its associated companies.
Addressing Past Challenges
In the past, grappling with the assessment and treatment of misconduct not directly linked to an individual's professional competence has been a significant hurdle for regulators. For instance, the case involving Jon Frensham's prohibition from the financial services sector due to a criminal conviction raised questions regarding the connection between personal conduct and professional life.
Despite some regulatory actions attempting to address non-financial misconduct, there has been ongoing contention regarding assessing misconduct unrelated to professional competence. Various regulatory bodies, such as the Solicitor’s Regulation Authority and Lloyd’s of London Enforcement Board, have faced similar challenges in this domain.
The Framework of Conduct Rules
The proposed rules aim to expand the Code of Conduct Rules (COCON) to explicitly cover "serious" non-financial misconduct in the context of the firm’s regulated activities. This includes behaviour that violates an employee's dignity or creates a hostile, offensive, or humiliating environment for them.
However, the rules draw a clear line regarding conduct related to the employee’s private life, providing guidance for firms to distinguish between personal and work-related conduct.
Fitness and Propriety Assessments
The assessments of fitness and propriety are crucial in evaluating an individual's annual certification and senior managers. The proposed changes explicitly link personal conduct to an individual's fitness and propriety, emphasizing that private conduct can still be relevant to these assessments.
Additionally, the proposal recommends a more comprehensive assessment, considering not just financial crimes but also criminal convictions related to violence, sexual offenses, or discriminatory practices.
Looking Ahead
While these proposed rules and guidelines offer a more structured approach, they introduce complexities. Firms might find it challenging to strike a balance in individual cases, especially when the misconduct is seemingly minor or clearly outside the realm of business interests. The widened scope of relevant misconduct also adds to the complexity.
In the end, these proposals signify a transformative shift in the financial sector’s regulatory landscape, attempting to address the intricate interplay between personal conduct and professional life while aiming to foster a more inclusive and responsible financial environment.
Comments