When misconduct outside the workplace becomes an issue of personal integrity

• United Kingdom

• Employment law
• Financial services disputes and investigations
• Financial services

03-09-2021

Non-financial misconduct has been a regulatory priority for some time and a recent Upper Tribunal has for the first time addressed whether the FCA was entitled to seek a prohibition order against an individual based on a conviction for a criminal offence not involving dishonesty (sexual grooming of a minor on two occasions and breach of bail conditions) which was unrelated to his regulated activity. Having done so, it is clear that this remains an incredibly difficult area.

FCA focus on non-financial misconduct

In 2018 Christopher Woolard, then FCA Executive Director of Strategy and Competition, made clear that ‘non-financial misconduct is misconduct plain and simple’.  In the same year Megan Butler (then FCA Executive Director of Supervision) clarified that the senior managers and certification regime would hold leaders to account and that while the fitness and propriety test does not explicitly address sexual harassment (or non-financial misconduct more widely), aspects of an individual’s behaviour are relevant for this assessment. As Ms Butler unequivocally stated, ‘we view sexual harassment as misconduct’ and in turn, ‘sexual misconduct is misconduct which can drive a poor culture’.

The ambit of non-financial misconduct has since been broadened to include behaviours such as bullying, discrimination, harassment, victimisation, exclusion and favouritism and it is now clear that such behaviours will go to an individual’s fitness and propriety to do their job, particularly in the case of a senior manager.

In November 2020, the FCA banned three individuals from working in the financial services industry after they were found guilty of serious non-financial indictable offences.

Announcing the prohibitions, Mark Steward, FCA Executive Director of Enforcement and Market Oversight, stated: ‘The FCA expects high standards of character, probity and fitness and properness from those who operate in the financial services industry, and will take action to ensure these standards are maintained’.

The law and regulation

The FCA may withdraw approval from a senior manager under section 63 Financial Services and Markets Act 2000 if it considers that person not to be fit and proper to perform that function. Section 1B FSMA sets out the FCA’s operational objectives including securing protection for consumers and protecting and enhancing the integrity of the UK financial system.

The FIT section of the FCA Handbook sets out the relevant criteria to consider when assessing fitness and propriety. The most important considerations are honesty, integrity and reputation, competence and capability and financial soundness. FIT 2.1.1G provides that in determining honesty, integrity and reputation, the FCA will have regard to all relevant matters including – but not limited to – those listed in FIT 2.1.3G. This list includes whether an individual has been convicted of a criminal offence or been the subject of criminal proceedings. When considering whether to make a prohibition order, all the relevant circumstances of a case must be taken into account and having a criminal conviction does not automatically mean that an individual is not fit and proper.

Regarding integrity, case law has shown that a person who is dishonest will always lack integrity and reputation but it does not follow that a person who lacks integrity must also be dishonest. The correct legal approach to the question of integrity was considered in Tinney v FCA [2018] UKUT 0435: ‘Even though a person might not have been dishonest, if they either lack an ethical compass, or their ethical compass to a material extent points them in the wrong direction, that person will lack integrity’.

Jon Frensham appeal

The Upper Tribunal has for the first time ruled on a case where the FCA sought a prohibition order against an individual, Jon Frensham, based on his conviction for a criminal offence not involving dishonesty (sexual grooming of a minor on two occasions and breach of bail conditions) which was unrelated to his regulated activity.

Mr Frensham appealed against the FCA’s prohibition order, contending that the FCA had wrongly applied the fitness and properness test to the facts. He argued that the FCA had allowed irrelevant considerations to affect its judgment and did not have sufficient regard to relevant factors.

In this case, the relevant considerations were whether it could be demonstrated that Mr Frensham lacked integrity or the requisite reputation to work for a firm undertaking regulated activities.  The Upper Tribunal had to consider the overlap between private life and work life and the extent to which they impinge upon each other.

Mr Frensham’s appeal to the Upper Tribunal against the FCA’s withdrawal of approval and prohibition order attempted to test the legality of this action.

Even though his offence was not committed at work and did not involve financial dishonesty, the FCA argued that it involved him deviating from legal and ethical standards in seeking to exploit those less vulnerable than himself. The FCA considered that this behaviour was fundamentally incompatible with his role as a financial advisor and, further, that there was a risk of erosion of public trust should he be permitted to continue in practice.   

The FCA also introduced a new complaint before the Tribunal, saying that Mr Frensham had not been open and transparent with it because he did not inform the FCA of a number of matters, namely (i) his earlier arrest in March 2016 which led to bail conditions being imposed (ii) his arrest and remand in custody in respect of the offence which led to his conviction (iii) his failure to tell the FCA that, whilst on remand, he was not for five weeks in a position to discharge his controlled functions or ensure compliance by the firm of which he was the sole approved person with its regulatory obligations and (iv) his failure to inform the FCA of the decision of the Chartered Insurance Institute to refuse to renew his Statement of Professional Standing and its decision to expel him from membership.

Shortly before the Upper Tribunal heard this appeal, the High Court had ruled in Beckwith v SRA [2020] EWHC 3231 that ‘a sexual encounter’ between a male law firm partner and a female solicitor did not breach Principle 2 of the Solicitors’ Regulation Authority (SRA) Principles (the obligation to act with integrity) or Principle 6 (the requirement to behave in a way that maintains the trust the public places in solicitors and in the provision of legal services). Read our briefing. Mr Beckwith was in a position of seniority and authority to the junior lawyer and it was found that he had acted ‘inappropriately’ although there was no suggestion that the ‘encounter’ was non-consensual. In this case, the Court made it clear that the requirement to act with integrity must be applied within the context of the relevant statutory framework. Professional rules should apply to private life only when that conduct realistically touches on the practice of their profession and, on the facts, the Court held that the SRA had erred in its findings that Mr Beckwith was in breach of the SRA Principles 2 and 6 and overturned the SRA’s decision.

The Upper Tribunal in the Frensham appeal summarised the relevant principles derived from solicitors’ cases:

• integrity means adherence to ethical standards of the profession (in this case acting as an independent financial adviser)
• there is an expectation that professionals may be held to a higher standard than to those outside the profession (although professionals need not be paragons of virtue)
• the need for public trust in the provision of professional services means that some scrutiny of a person’s private affairs is permitted
• provisions requiring professional persons to act with integrity or to be of sufficient repute may reach into private life only when conduct that is part of a person’s private life realistically touches on their practice of the profession
• the decision maker should consider whether public confidence in the profession would be harmed if the public had knowledge of the facts and found that the individual under scrutiny was able to continue his profession

Whilst the Upper Tribunal found flaws in the FCA’s approach to the relevance of the conviction, it did not feel that those flaws justified overturning their decision.

The FCA was fully entitled to take into account non-financial misconduct which occurred outside the work setting. The lack of examples in EG and FIT in the FCA Handbook was simply a reflection of the fact that the FCA had chosen not to bring cases based on non-financial misconduct occurring outside the workplace until recently.

The Upper Tribunal saw no link between the offence and the consumer protection objective based on his serious failure to act with personal integrity but it did agree with the FCA that there was a link between the offence and the integrity objective. That objective embraced public confidence in the financial services industry and in that context whether there was a significant risk that the confidence of consumers would be impaired if it were known that a person guilty of an offence of this heinous nature were allowed to work as a financial adviser. As noted in Beckwith, public outcry in itself was not proof that the acts gave rise to a matter falling within the regulator’s remit. On the facts, Mr Frensham put his own interests before those of a minor who he sought to exploit for sexual gratification and indeed breached bail conditions in so doing. In those circumstances, the FCA was entitled to consider that the behaviour would seriously affect his professional reputation and that of the industry as a whole.  However, the Tribunal were critical of the way that the FCA presented its case, and that they had not clearly linked the facts of the case to the alleged breach of the integrity objective.  The Tribunal stated that, based on the conviction alone, they would have asked the FCA to reconsider the decision.  However, the new allegations made by the FCA in relation to Mr Frensham’s failure to be open and co-operative were upheld, and on that basis, the Tribunal agreed to uphold the FCA’s decision.

Conduct rule breach or fitness and propriety?

The cases of Frensham and the three other financial advisers prohibited for sexual offences are relatively clear cut. Less serious cases are likely to prove to be even more problematic to determine. What about a senior manager serially making offensive jokes? This will surely go to fitness and propriety but may be managed by remedial training and other steps including disciplinary measures and ongoing assessment.

It is often more difficult to establish whether certain behaviours constitute a conduct rule breach. In order to constitute a conduct rule breach there has to be a sufficiently close connection between the individual’s functions and the breach and this is not always easy to establish.   It is interesting that, according to the FCA’s own evidence in the case, one of the reasons for the delay in bringing regulatory proceedings against Mr Frensham (between the FCA being aware of Mr Frensham’s conviction in 2016 and a Warning Notice being given to Mr Frensham in May 2020) was that discussions were taking place internally, at a senior level, as to how to proceed with cases of this kind. The FCA gave evidence that the FCA’s thinking was evolving during this period, taking into account the public’s view of such matters. It is clear that, if firms are struggling to know where to draw the line between the personal and the professional, then so is the FCA.

Looking ahead

The FCA and the PRA have long voiced their intention to improve conduct and culture within the financial services sector. In the FCA’s 2020/21 Business Plan the FCA identified culture as one of its cross-sector priorities.  

In November 2020 Jonathan Davidson, FCA Executive Director of Supervision, repeated the FCA’s increased focus on non-financial misconduct and - noting that the drivers of poor conduct may include remuneration and a lack of diversity.  The FCA has since pushed a robust diversity and inclusion (D&I) agenda. Nikhil Rathi, FCA Chief Executive, described D&I as a regulatory issue, noting ‘diversity reduces conduct risk’ and the FCA Business Plan 2019/20 made clear that ‘D&I issues may have an impact on the fitness and propriety of senior managers’. Most recently, the publication of the FCA and PRA’s joint discussion paper on diversity and inclusion seeks to improve the range of voices within the industry. 

The FCA has separately stated its expectation to see non-financial metrics in remuneration policies reflecting culture and D&I targets alongside broader ESG measures.

The FCA has also focused on the ‘speaking up and listening up’ agenda, conscious that without psychological safety, people will not speak out against a poor culture.

Read the Upper Tribunal’s decision.