UK Regulators Propose Stricter Rules for Nonfinancial Misconduct in Financial Firms

The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) in the UK are taking a significant step in addressing nonfinancial misconduct in the workplace. In a move to boost diversity and inclusion (D&I) and improve workplace culture, the regulatory bodies have introduced proposals to ensure that nonfinancial misconduct, such as bullying, racial discrimination, and sexual harassment, is treated as seriously as other regulatory offenses within financial firms.

The FCA and PRA believe that unhealthy workplace environments pose a clear risk to a firm's governance and culture, and they hinder efforts to enhance diversity, reduce groupthink, and tap into talent. These negative aspects can drive individuals away from the profession or lead them to leave. Consequently, the regulators want financial firms to consider the lack of diversity and inclusion as a nonfinancial risk.

The proposals put forth by the FCA and PRA include new rules and guidance on how financial firms should handle incidents of nonfinancial misconduct and discipline employees. They emphasize the importance of evaluating bullying and similar misconduct within the workplace as relevant to an employee or manager's "fitness and propriety." Furthermore, they stress that serious nonfinancial misconduct outside the workplace should have implications for an individual's fitness to work within the sector.

FCA Chief Executive Nikhil Rathi underlined their firm stance on nonfinancial misconduct, stating that they are leading among regulators in treating issues like sexual harassment as misconduct for regulatory purposes. The aim is to strengthen expectations regarding how regulated firms should consider such misconduct when assessing an individual's fitness and propriety for working in the financial industry.

Beyond addressing nonfinancial misconduct, the FCA and PRA have proposed broader measures to enhance D&I in the financial sector. These include establishing "flexible" and "proportionate" minimum standards for firms under the Senior Managers and Certification Regime. While these standards would apply to all firms, larger organizations would face additional requirements.

The proposed measures also call for firms to develop a D&I strategy outlining how they intend to achieve the regulators' D&I objectives and goals. This includes collecting, reporting, and disclosing data related to various D&I characteristics and setting specific targets to address underrepresentation within their organizations.

The consultation period for these proposals is set to close on December 18, allowing stakeholders to provide their feedback and insights on these initiatives.

Claire Cross, a partner at law firm Corker Binning, welcomed this consultation process as a positive and much-needed step forward. She noted that the FCA's previous regulatory outcomes focused on more clear-cut cases involving serious offenses, providing limited guidance for firms dealing with allegations of workplace bullying or sexual harassment.

James Alleyne, a legal director in the financial services regulatory team at law firm Kingsley Napley, emphasized that the FCA's focus on nonfinancial misconduct has been steadily increasing over the past five years. He added that the new proposals signal a significant shift in the FCA's approach, and regulated firms and individuals should be prepared to adapt to these changes.

As organizations strive to navigate these new proposals, one key aspect will be the need to conduct audits and develop forward-looking strategies to ensure they are well-prepared to handle nonfinancial misconduct issues and promote diversity and inclusion effectively in the financial sector. These initiatives represent a proactive approach by regulators to create a more inclusive and accountable workplace culture within the industry.

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By fLEXI tEAM