Non-financial misconduct: the limits of a regulator’s powers?

• United Kingdom

• Employment law
• Financial services

30-11-2020

As all financial institutions will know, tackling non-financial misconduct is now a regulatory priority. Indeed, in his speech at the sixth annual Conduct and Culture Forum on 26 November 2020 Jonathan Davidson (FCA Executive Director of Supervision) referenced the recent prohibitions imposed on three individuals for conduct outside the workplace and noted: ‘we’ve increased our focus on non-financial misconduct because a culture where non-financial misconduct is tolerated is not healthy, it’s not safe and it’s not acceptable’.

This followed on from Christopher Woolard, then FCA executive director of strategy and competition, making clear in a speech in 2018 that the way in which firms handle non-financial misconduct, including allegations of sexual misconduct, is potentially relevant to its assessment of that firm. The FCA has defined non-financial misconduct widely to include harassment, victimisation, bullying and intimidation. After Megan Butler, FCA Executive Director spoke out about sexual harassment to the Women and Equalities Committee in May 2018 the FCA received its highest number of whistleblower disclosures, including disclosures about gender, racism, bullying and homophobia.

The takeaways from this and the repeated emphasis from the FCA on culture and non-financial misconduct being a crucial part of the fitness and propriety assessment of a senior manager (and certified person) seem to be that misconduct (with a particular focus on sexual misconduct) inside or out the workplace should be scrutinised and misbehaviour which crosses the lines of acceptability may lead to an individual failing a fitness and propriety test or worse. The recent FCA prohibitions resulted from convictions for serious sexual offences leading to prison sentences and requirements to sign the sex offenders register.

So much seemed clear until the High Court decision handed down on 27 November in Beckwith v SRA.

Beckwith v Solicitors Regulation Authority

This case concerns a partner in a City law firm whose activities outside the workplace led the solicitors’ regulator, the Solicitors’ Regulation Authority (SRA) to fine him £35,000 and to order him to pay £200,000 in costs. Mr Beckwith, a married man, was found culpable by the SRA of a ‘sexual encounter’ in 2016 with a junior assistant (A) for whom he was supervising partner. Mr Beckwith and A had been drinking with others in a pub near their workplace to celebrate A’s imminent departure from the firm. A became ‘heavily intoxicated’ and the SRA’s disciplinary tribunal found that her judgment and decision-making was impaired. A invited Mr Beckwith into her home. There was then a ‘sexual encounter’ - there was no finding that this had been without consent although the tribunal did find that Mr Beckwith had not been invited in with a view to sexual activity, and that he knew this.

The tribunal rejected the allegation that Mr Beckwith had acted in abuse of his position of seniority or authority. It found instead that by engaging in sexual activity with A he had acted ‘inappropriately’.

Based on their findings the tribunal went on to conclude that Mr Beckwith’s actions were a breach of Principle 2, the obligation to act with integrity (similar to individual Conduct Rule 1 in the FCA rules), and also a breach of 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. The scope of regulation by the SRA depends on the interpretation of standards set out in Principles and the SRA Code of Conduct.

The High Court has now overturned the regulator’s decision.

The High Court decision

Mr Beckwith appealed to the High Court, which found that ‘there can be no hard and fast rule [that SRA edicts can] never be directed to the regulated person’s private life, or that any/ every aspect of [a solicitor’s] private life is liable to scrutiny’. Professional rules should apply to private life only when that conduct realistically touches on their practice of the profession.

In this way, there should be a balancing exercise between the right to respect for a private life and the public interest in the regulation of the profession.

The High Court also noted ‘What is or is not professional misconduct depends on the rules of the scheme that applies to the profession in hand’. In such cases, the relevant regulator or tribunal does have to decide whether the conduct alleged can be described as professional misconduct. Put another way, whether or not a notion of ‘professional misconduct’ has any part to play in any particular regulatory scheme will depend on the terms in which that scheme has been made. There is no universal principle.

So far as concerns this appeal, the scope of regulation by the SRA and the Tribunal depended on the proper interpretation of the standards set out in the SRA Handbook applied in accordance with the procedural rules made for that purpose.

The High Court noted three points of principle. First, in the context of the regulation of a profession there is an association between the notion of having integrity and adherence to the ethical standards of the profession. This is consistent with the ordinary meaning of the word, namely adherence to moral and ethical principles. The second is that on matters touching on their professional standing there is an expectation that professionals may be held to a higher standard than those that would apply to those outside the profession. The third is that a regulatory obligation to act with integrity “does not require professional people to be paragons of virtue”.

The High Court quashed the fine of £35,000 and set aside the costs order.

So where does this leave us?

The High Court’s decision suggests that a line must be drawn between behaviours that affect an individual’s ability to do their job and those behaviours that, even if reprehensible or morally questionable, do not.

Almost all employees working for financial institutions are bound by the Conduct Rules which set out standards of conduct similar in nature to those of solicitors. Senior managers and certified persons must additionally satisfy the fitness and propriety regime. Each of the FCA/PRA Conduct Rules applies only to a person’s conduct relating to the activities which that person performs in their capacity as an employee or senior manager of that firm. Misbehaviour in an individual’s private life is unlikely therefore to come within scope of the Conduct Rules, but it may be relevant to a fitness and propriety assessment.

The assessment of fitness and propriety lies in the hands of the firm for a certified person and also in the hands of the regulator for a senior manager.

Making a prohibition order for non-financial misconduct will likely only occur in very rare cases. It is more likely that allegations of inappropriate behaviour will be considered as part and parcel of a fitness and propriety assessment.

Failing an assessment can of course be career-ending and it is at that point that an individual may seek redress. In most cases this is likely to be by way of claiming unfair dismissal where the usual rules will apply as to procedural and substantive fairness. However, the decision in Beckwith may give employees who are dismissed for non-financial misconduct which does not directly relate to the work they carry out some assistance in arguing that the decision was unfair.

https://www.judiciary.uk/wp-content/uploads/2020/11/Beckwith-v-SRA-judgment.pdf