As the definition of conduct under the FCA’s Conduct Risk initiative continues to evolve, it changes the scope of what is considered ‘fit to proper’ behavior under the SMCR. The FCA is changing its view on non-financial misconduct, and in particular sexual harassment. Principal Consultant Liz Hornby examines the issue and what it means for SMCR training.
The SMCR has applied to the banking sector since 2016. It will finally replace its predecessor, the Approved Persons regime, entirely in December this year.
One aspect of the SMCR that has raised questions and caused practical problems to date is the scope of ‘conduct’ in the context of:
- The Individual Conduct Rules; and
- The annual ‘fit and proper’ assessment for Senior Managers and Certified Persons
Under the SMCR, firms have increased responsibilities in relation to Conduct Rule breaches and are responsible for signing off relevant staff as ‘fit and proper’ for their role. It is therefore of great importance that the meaning of conduct in these contexts is clear and applied consistently across the industry.
SMCR & Individual Conduct Rules: The Current Position
The current position generally accepted by the industry is that conduct is only relevant under the Individual Conduct Rules where it directly relates to the performance of an individual’s role within the firm. This position appears to be supported by COCON 1.1.61 and the illustrative examples provided by the UK's Financial Conduct Authority (FCA) in COCON 4.1.12, which are exclusively related to customer and market detriment and behaviors aligned to the FCA’s Conduct Risk initiative.
Conduct under the ‘fit and proper’ assessment3 in the FCA FIT Handbook is currently interpreted in a similar way. Dishonest behavior outside the workplace has, however, been accepted as relevant here and there are precedents for this – see the infamous ‘fare-dodging’ case4 for example. However, there is very little guidance provided in the FIT Handbook in relation to non-financial misconduct and, to date, wider behavioral matters have generally been seen as falling under the values and culture of the firm; relevant from an HR and internal employment disciplinary perspective, but not a regulatory matter.
Conduct Rules: What Is Changing?
Recently, in line with their focus on culture and individual responsibility and accountability at all levels of the financial services industry, the FCA has indicated that its view on non-financial misconduct is evolving. This seems to be part of a growing trend, with conduct (as defined under the FCA’s Conduct Risk initiative) becoming a much a less defined concept and increasingly more closely aligned to culture.
The change can be traced back to September 2018, when Megan Butler, Executive Director of Supervision for Wholesale and Specialist Investment at the FCA, wrote to the ‘Women and Equalities Committee Report on Sexual Harassment in the Workplace’5. In her letter, she clearly signaled that “non-financial personal conduct” was included within the scope of the SMCR. She also linked it to FCA’s wider focus on culture and psychological safety6, stating that, “A culture where sexual harassment is tolerated is not one which would encourage people to speak up and be heard, or to challenge decisions.”
Specifically, Megan Butler went on to link “non-financial misconduct”, including sexual harassment, directly to ‘fit and proper’ assessments under the SMCR. Indeed, she backed up this position by stating that the FCA had already used its powers to block the appointment of senior staff on such grounds. This position is supported by the disclosure in the FCA’s Enforcement Annual Performance Report published in July 2018 that the FCA had 61 open culture and governance enforcement investigations at the end of March 2018 – a substantial increase from the 15 open at the end of April 2017.
Beyond the ‘fit and proper’ assessment, the use of the word “misconduct” in this context by a FCA director has led to questions over whether sexual harassment and other types of “non-financial misconduct” in the workplace could amount to a breach of the Individual Conduct Rules. This seems to follow logically from Megan Butler’s statement that, “Misconduct is misconduct, whether it is financial or non-financial.”
Individual Conduct Rule 1 (‘You must act with integrity’) seems to be the only potential fit in terms of scope. As discussed above, sexual harassment and other types of non-financial misconduct seem to fall outside the guidance in the FCA Handbook, but the list of examples provided by the FCA is clearly non-exhaustive.
These developments have caused confusion for firms that have already embedded the SMCR into their systems and controls as well as those preparing to do so. There are increasing calls from the industry and their external advisers for clear guidance in this area from the FCA.
For more insights on SMCR training, download our free ebook, ‘How to Ensure Your Organization is SMCR-Ready’.
Non-Financial Misconduct & the Implications for SMCR Training
This lack of clarity directly impacts SMCR training and may directly impact the content of current training materials. This includes training delivered to:
- Senior Managers, who need to be kept up to date with the FCA’s latest thinking and ensure that their firm’s policies, procedures and training materials reflect it
- All staff who need to understand their regulatory obligations and personal liabilities
- Staff involved in carrying out ‘fit and proper’ assessments (potentially all Line Managers within a firm) and those conducting or contributing to internal disciplinary hearings
Beyond the training directly linked to the SMCR, the latest messages from the FCA, make this a good time for firms to consider their current training in relation to values, equality and diversity, and other behavior in the workplace.
LEO GRC (formerly Eukleia) has extensive experience of SMCR training and supporting organizations to implement it. To find out more about our off-the-shelf courses and custom solutions, get in touch. To request a free trial of one of our off-the-shelf courses today, scroll to the Personal Conduct section of our generic course catalog.