Getting fit and proper

Sarah Butcher examines how the bar for ‘fitness and propriety’ is being raised for both individuals and firms as the FCA prepares to update its policy on non-financial misconduct

When Jon Hunt, a drunk 52-year-old financial planner from Walton-on-Thames in Surrey, began sending salacious messages to ‘Holly’, a 15-year-old schoolgirl he’d met on a dating website in 2016, he didn’t know that it would be the end of his career. ‘Holly’ was in fact a 36-year-old woman from a vigilante group of paedophile hunters. When Hunt arranged to meet ‘Holly’ at Plumstead station a few days later, the 36-year-old turned up instead.

As a result, Hunt was convicted in 2017 of grooming and attempting to meet a minor. He quickly changed his name to ‘Frensham’ and continued to run his business, albeit with fewer clients. But four years later, the Financial Conduct Authority (FCA) banned him indefinitely from holding a regulated role in the UK financial services industry, thereby closing his business for good.

There has always been questionable behaviour in workplaces, but now younger employees are less tolerant of cultural laxity

Hunt fought the FCA’s ban, arguing that in his entire 30-year career he’d only ever had five minor complaints against him from clients and that the ‘Holly’ incident was ‘irrelevant’ in the context of his job. The FCA disagreed, and so – ultimately – did the courts, which upheld the regulator’s ban, noting in particular that Hunt had misled the FCA in the aftermath of his criminal conviction and that he appeared to lack remorse. Therefore, even though the conviction had nothing to do with his work activities, and even though some clients were still happy to deal with Hunt/Frensham after his conviction, he was deemed to lack integrity. His career was over.

Non-financial misdemeanours

Hunt/Frensham’s case casts a shadow over attempts to define what integrity looks like in the context of a financial services career. Fortunately, few people in financial services are found guilty of grooming minors. More, however, are perpetrators of lesser misdemeanours that may not directly relate to their technical ability to do their jobs, but that nonetheless indicate a lack of good character. The FCA is coming after them.

The regulator classes these misdemeanours as ‘non-financial misconduct’ (NFM). Following a consultation on employee diversity in 2023 and a survey on the prevalence of such misdemeanours in February 2024, the FCA promised in October 2024 to update its policy on the issue in ‘due course’. Financial services firms, and their employees, are on standby. A change is coming, and soon.

The contents of the change have already been flagged. The regulator says that it intends to ‘better integrate’ considerations of non-financial misconduct into its fitness and propriety assessments, its conduct rules and even into the ‘threshold conditions’ that firms must meet if they’re to be regulated in the sector. Not only will individuals committing such acts be banned, so will the firms that tolerate them.

What is non-financial misconduct?

But what exactly is non-financial misconduct? The definition is both vague and not. The FCA’s February survey identified six distinct types: violence or intimidation; the possession or use of illegal drugs; discrimination, bullying and harassment; sexual harassment; and ‘other’. It found that 41% of misdemeanours fell into the broad ‘other’ category. The FCA says they included such things as being drunk at work, using inappropriate language at work or in a related environment and accepting inappropriate gifts. However, the list is non-exhaustive. “There is no legal or formal definition of non-financial misdemeanours,” notes law firm Fox Williams.

The vagueness of the definition, coupled with increased awareness of inappropriate behaviour, might explain why non-financial misconduct is becoming more prevalent. In 2021, the FCA says 0.5% of employees at wholesale banks had been affected. By 2024, that had risen to 0.8%. It’s low, but rising.

Culture will be managed more closely

There has always been questionable behaviour in workplaces, but the new generation is less tolerant of cultural laxity. The FCA’s February survey found that younger employees aged 17-24 are particularly concerned about non-financial misdemeanours at work. A firm that wants to retain the best of the next generation needs a culture that doesn’t tolerate poor behaviour. It’s “an essential component of a firm’s long-term success and reputation”, observes Marian Bloodworth, a Fox Williams partner.

If you’re a senior manager, there’s an added impetus to stamp out poor behaviour. The coming misconduct rules are expected to intersect with the senior managers and certification regime. Laura Bridgewater, a partner at law firm Macfarlanes, says that not only will senior managers involved in non-financial misconduct incidents be deemed to lack fitness and propriety if they’re found guilty of transgressions themselves, but that they “could be held responsible for failings by their firms to monitor, detect and address non-financial misconduct by employees (ie a systems and controls failing), even where the senior manager was not involved in the underlying misconduct”.

If you’re a senior manager, there’s an added impetus to stamp out poor behaviour...they could be held responsible

Preventing that sort of risk means addressing culture. The FCA says that a poor culture that discourages employees from speaking up raises questions about decision-making and risk management. Cultural enhancement is becoming a matter of law and compliance, says Bloodworth. Unfortunately, though, she notes that there are no quick and easy routes to cultural improvement. She says Fox Williams is advising clients that want to fix culture to communicate clearly what acceptable conduct looks like, to train employees on non-financial misconduct, to outline procedures for reporting non-financial misconduct and to foster an environment where employees feel safe to report concerns without fear of retaliation.

For the moment, most incidents of non-financial misconduct are reported rather than detected. The FCA’s survey found that in wholesale banks, 52% of non-financial misconduct cases were discovered as a result of a grievance process and that another 32% were discovered from whistleblowing. Only 6% were discovered using surveillance tools. But with senior managers incentivised to unearth non-financial misconduct, these tools stand to become more important in the future.

Companies such as Smarsh provide AI-enabled tools to help firms track employee conduct. Robert Cruz, Vice-President, Information Governance for Smarsh, says firms can use systems designed for unearthing financial crimes such as insider trading to identify non-financial misconduct too. “Businesses must ensure that monitoring systems capture data in real time and in their original context, so that conversational nuances, which are more likely to occur in these cases, are easily identifiable for any risk officer,” Cruz says.

The sanctions

It’s not enough just to detect non-financial misconduct, though. The regulator also expects that something will be done about it, and this raises further issues around investigations and repercussions. Bloodworth notes that there are no statutory requirements for a non-financial misconduct investigation, but that the process will typically involve the HR department in collaboration with the risk and compliance teams and even with legal counsel where necessary.

She says senior staff will also need to manage and avoid things such as ‘the risk of bias, breaches of confidentiality’ and ‘retaliation’ against people who report misconduct. None of this is easy. Affected parties will need to be interviewed. Perspectives may be different, and conflicting claims will need to be weighed. When an incident of non-financial misconduct is positively identified, the regulator will expect it to be added to an individual’s employment reference – putting even more onus on employers to make sure things are right.

The change has the potential to shine a much brighter light on behaviours...but also... to be very time-consuming

The change has the potential to shine a much brighter light on behaviours across the financial services sector, but it also has the potential to be very time-consuming. Bridgewater notes that the FCA’s current proposals are that conduct both inside and outside the workplace will be relevant to assessing whether a person is fit and proper to perform a senior management or certification function. Firms could find themselves interviewing people who aren’t even their employees.

In this context, cases such as that of Hunt/Frensham may end up appearing comparatively clear cut. Many incidences of non-financial misconduct are likely to involve “one person’s word against another and a lack of tangible evidence”, says Bridgewater. “Firms must carry out a delicate balancing exercise, weighing up regulatory expectations and obligations against the risk of an employment law claim from an individual facing a potentially career-ending decision.”

And if they don’t? Firms will be deemed to have failed in their duty to stamp out such behaviours. At best, they will be asked to improve. At worst, they will lose their licence. NFM may only be a three-letter acronym but it’s about to become a big deal indeed.

Sarah Butcher is Global Editor for eFinancialCareers. She is involved in many financial career issues and is a leading commentator on the subject, both in the UK and the US