This is, in our view, the most important change in the policy statement. Conduct in an individual’s private life will only be relevant to an assessment of their fitness and propriety if it shows there is at least a material risk that the individual will breach regulatory standards and requirements. The FCA has helpfully clarified that a ‘material risk’ is one that is not remote or speculative. It is relevant to all conduct that does not itself constitute a breach of the requirements of the regulatory system (and the guidance also clarifies that even a breach of those requirements does not automatically mean that an individual will be found not fit and proper).

This, perhaps, went without saying. However, given concerns expressed by those who responded to the consultation about the costs and difficulty of investigating matters occurring in an individual’s private life, the FCA has clarified this point. The main concern was that the guidance would require firms to investigate rumours, implausible allegations or allegations of conduct that (if true) was trivial. Helpfully, the FCA has expressly clarified in the guidance that this is not the case.

Under the guidance, conduct in an individual’s private life will be relevant to an assessment of their fitness and propriety if it would breach regulatory standards if repeated in work. The FCA has clarified that it should not automatically be assumed that conduct by an individual in their private life will be repeated in work.

This limits the scope of conduct that is potentially relevant and requires investigation. Not only does it need to be conduct that would breach regulatory standards if repeated in work, but there needs to be a material risk of it actually being repeated in that context. In other words, if someone is raucous and irresponsible at the weekend but always professional and upstanding at work, their conduct outside of work is unlikely to render them not fit and proper. Binge drinking on a Saturday night is no longer a potential regulatory issue.

The FCA’s draft guidance stated that conduct in an individual’s private life might be relevant to an assessment of their fitness and propriety if it demonstrated a willingness to disregard ethical or legal obligations. Many respondents to the consultation paper (including Lewis Silkin) raised concerns that this would require firms to make subjective judgments on morality.

The FCA has clarified that firms will not be required to judge whether an individual is an ethical person; rather, upholding ethical considerations is just a key part of acting with integrity. In the FCA’s view, a firm’s decision on fitness and propriety should be based on objective evidence of repeated misconduct rather than a subjective assessment of an individual’s personal ethics, beliefs or morality. However, the objective evidence must still be assessed to determine whether it demonstrates a willingness to disregard an undefined range of ethical obligations. Determining what those ethical obligations are has been left to firms, which inevitably involves some degree of moral judgment. From an individual’s perspective, they have no guarantee that the ethical obligations they are expected to adhere to will have any relevance to their regulated role.

Under the final guidance, private conduct that demonstrates a willingness to abuse a position of trust or exploit the vulnerabilities of others remains relevant to fitness and propriety assessments, even if there is no risk of it being repeated in work. This is potentially very broad. Should, for example, the coach of an under-17’s football team beginning a sexual relationship with a player be regarded as exploiting a position of trust?

Fortunately, the overarching test remains whether an individual will follow the requirements of the regulatory system, with the need for at least material risk of breach. This appears to operate as an appropriate limitation to the otherwise vague and potentially very broad scope of ethical obligations and should provide some comfort to individuals that they should not lose their jobs for conduct that has no relevance to or impact on their job. 

In its draft guidance, the FCA stated that repeated breaches of law by an individual may be relevant to an assessment of their fitness and propriety. The FCA gave the example of repeated minor motoring offences. In our response to the consultation paper, we noted that this appeared to hold the conduct of those working in the financial services sector to higher standards than those imposed by other regulators, including the standards imposed by the SRA on solicitors. The example of minor driving offences has now been deleted and does not appear in the final guidance.

Nevertheless, the underlying principle (that minor breaches of law might be relevant to fitness and propriety) remains. The FCA has said that it expects firms to make reasonable judgements about what kinds of offences, or the frequency of their repetition, might indicate that someone is not fit and proper. This means that there is no guarantee that repeated driving offences will never act as a bar to working in this sector. However, the deletion of this specific example should give firms undertaking their annual certification process greater confidence that they could justify knowingly retaining an individual with multiple points on their driving licence - particularly where the person does not drive to work and all other evidence indicates there is no material risk that they will breach regulatory standards and requirements.

The FCA stated in the draft guidance that firms do not need to proactively monitor individuals’ social media accounts for posts that might undermine their fitness and propriety. That was welcomed by firms in their responses. However, respondents wanted more clarity on when firms would be expected to respond to allegations about social media activity in private life. In the final guidance, the FCA explains that when a firm sees a post or one is brought to its attention, it should treat it consistently with ‘real life’ conduct in someone’s private life. The FCA also clarified the threshold that applies: the expression of views will be relevant to fitness and propriety if it indicates a material risk of the individual breaching regulatory requirements.  This applies to lawfully expressed views as well.

Given the clarified threshold, the circumstances in which a lawful expression of views might render someone not fit and proper seem likely to be narrow, but this does remain a possibility. Should a firm encounter a situation when this is a possibility, it will need to be wary before concluding the individual is no longer fit and proper. An individual’s freedom to express a belief is protected under  the European Convention on Human Rights and discrimination law, and  employers have run into difficulties when dismissing employees for views expressed on social media.

The draft guidance had stated, in respect of a firm’s obligations to make reports to the FCA, that the fact that a firm has not been able to establish the truth of an allegation does not mean that the firm should not report it to the FCA if, were it established to be true, it would reasonably be material to an assessment of fitness and propriety. Respondents to the consultation strongly disagreed with the concept of firms reporting unproven allegations to the FCA.

The FCA has responded by deleting the offensive sentence so that it does not feature in the final guidance.  However, in its commentary, the FCA has explained that it has always been, and remains, its expectation that unproven allegations be reported to it, pointing out that existing notification requirements (that require firms to report, as soon as possible, any information of which they become aware that would reasonably be material to an assessment of a senior manager’s   fitness and propriety) are not limited to matters of established fact. The deletion of the sentence from the final guidance might avoid encouraging overzealous reporting but the fact remains that, if you are a senior manager and your firm hears of conduct in your personal life that may be material to an assessment of your fitness and propriety (which will now encompass a very broad range of conduct), the FCA will expect to be notified of that promptly and potentially before the firm even investigates.

Moving on from fitness and propriety assessments, this point and the remaining points concern the final guidance on the conduct rules. The proposed changes included amendments to senior manager conduct rule 4 (that requires senior managers to disclose information of which the regulators would reasonably expect notice). These were aimed at removing any suggestion that senior managers are not obliged to disclose information about themselves and stating, expressly, that they should disclose matters that are material to an assessment of their fitness and propriety.  Despite objections from some respondents to the consultation paper, these changes have made it into the final guidance. Given the broader range of NFM (both in work and in an individual’s private life) that might be material to an assessment of a senior manager’s fitness and propriety, this represents a significantly broader obligation for senior managers to self-report.

The FCA has stated that firms may judge whether NFM is sufficiently serious to amount to a breach of the conduct rules, so long as their judgement is reasonable. Some of those who responded to the consultation on the proposed guidance had sought further guidance on this. However, in the FCA’s view, further guidance on this point could never have been exhaustive or replace the need for a firm to exercise its own judgement.

We explained in our previous article that the FCA has introduced new rules for non-banks that make harassment or violence towards a fellow member of the workforce capable of breaching the conduct rules if it ‘relates to’ an area of the firm’s business that involves (broadly speaking) its regulated activities. The change meant that this type of conduct did not need to ‘form part of, or be for the purpose of’ those regulated activities in order to be relevant, with the effect that a much broader range of conduct will be in scope. The new rules do not apply to banks because they have never been subject to the same limitation as non-banks (i.e. it has never been the case at banks that conduct needed to ‘form part of, or be for the purpose of’ regulated activities to breach the conduct rules). However, the FCA’s proposed guidance on when NFM might breach the conduct rules all referred back to the new rules for non-banks, confusing the position for banks – would banks be subject to the proposed guidance or not?

The FCA’s final guidance now includes a somewhat clunky mechanism that applies the relevant part of the new rules for non-banks to banks, but in the form of guidance. Whilst the approach is a bit substandard, the position is now clear:  the new guidance on NFM and the conduct rules will apply to banks.