FCA re-emphasises its commitment to financial services culture in response to UK Treasury Committee

Last month, we published an Insight on the Treasury Committee's letter to the Financial Conduct Authority (FCA) relating to the FCA's investigation into Odey Asset Management (OAM) and its founder. That letter was prompted by allegations of sexual misconduct at OAM.

The FCA has now responded to that letter.

Although the FCA's response does not address in detail each of the questions raised by the Treasury Committee about its OAM investigation, it does highlight the FCA's continued commitment to dealing with issues of non-financial misconduct.

In particular, the FCA is likely to take action in circumstances where non-financial misconduct affects its assessment of:

• the fitness and propriety of an individual (the FCA points out that, in its view, non-financial misconduct can also be a breach of its conduct rules); and/or
• a firm's systems, controls and governance (the FCA points out that, in its view, poor firm culture can be linked to poor decision making and risk management).

The FCA also reports in its response that, of the approximately 1,000 whistleblowing reports it receives each year, around 12 of these relate to allegations of sexual misconduct. It states that it is currently considering six cases concerning criminal convictions and has two open enforcement investigations relating to non-financial misconduct.

Statutory objectives

The FCA stresses that it can only take non-financial misconduct into account insofar as that would achieve or further one of its statutory objectives.

It is not an alternative to action by another authority, for example criminal prosecution or an Employment Tribunal. The FCA points to the case of Jon Frensham v FCA, where the Upper Tribunal held that a conviction relating to child sexual grooming was insufficient to justify a prohibition by the FCA (the Upper Tribunal did uphold the prohibition on other grounds). The FCA says that this demonstrates the challenges it may face when seeking to prohibit people based on criminal convictions alone.

Despite this, the FCA says "We continue to consider, however, that such misconduct can, of itself, create a sufficient risk to our objectives such that it should result in a prohibition and we continue to pursue cases on that basis. We also recognise that Parliament may choose to legislate if it wished to specify that certain offences should lead to an automatic prohibition from a regulated sector."

The FCA has said that it intends to provide further guidance on the issue of how non-financial misconduct should be considered within its rules later this year.

Osborne Clarke comment

Non-financial misconduct is still on the FCA's radar, and it is committed to taking action where necessary.

It is, therefore, imperative that firms:

• put in place systems and controls targeted at dealing with poor firm culture and allegations of non-financial misconduct; and
• investigate any alleged non-financial misconduct thoroughly, particularly in light of ongoing fitness and propriety assessments of senior individuals.

We would encourage firms to contact us to discuss any decisions they may be taking in relation to these issues.