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UK FCA Seeks to Ban Regulated Person for Nonfinancial Misconduct

April 14, 2021

The Financial Conduct Authority (FCA) has emphasised in recent years that firms should consider nonfinancial misconduct when assessing the fitness and propriety of staff. On 29 March 2021, the FCA published a rare Decision Notice about the proposed ban of a regulated person for nonfinancial misconduct. While the facts of the case are exceptional, the FCA sets out in the Decision Notice its approach to nonfinancial misconduct and its response to points of mitigation put forward by the person. Firms will find the guidance in the Decision Notice helpful when considering the impact of nonfinancial misconduct on a staff member’s fitness and propriety.

The Case

In 2017, the relevant person, JF, was convicted of attempting to meet a child following sexual grooming. He was sentenced to 22 months’ imprisonment, suspended for 18 months, and was required to take part in a rehabilitation requirement. He was placed under an indefinite Sexual Harm Prevention Order and required to sign the sex offenders register.

At the time of committing the offence, JF was an approved person, but later assumed various senior management functions.

The FCA summarised its concerns:

Given the nature and circumstances of [JF’s] offending, the Authority considers that [JF] is not a fit and proper person to perform any function in relation to any regulated activity carried on by any authorised or exempt persons or exempt professional persons. This is because he lacks the necessary integrity and reputation.

As a result of his lack of integrity and reputation, [JF] poses a risk to consumers and to confidence in the financial system. Therefore, it is appropriate in order to advance the Authority’s statutory objectives (which include protecting consumers and the integrity of the UK financial system), to withdraw his approval to perform senior management functions and to impose a prohibition order on him….

Fitness and Propriety

Addressing JF’s fitness and propriety, the FCA said:

  • The FCA will consider (among other factors) a person’s integrity and reputation when assessing fitness and propriety.
  • JF lacked integrity because:
    • he “sought to exploit a child for his own sexual gratification;”
    • his conduct “amounted to a criminal offence and was also in breach of pre-existing bail conditions (relating to a different allegation with which he was ultimately not charged);”
    • he showed “a deliberate and criminal disregard for appropriate standards of behaviour.”
  • In relation to JF’s reputation:
    • JF “does not have the requisite reputation to perform functions in relation to regulated activities” considering “the nature of [his] offence and, separately, the associated publicity following his conviction;”
    • JF’s “lack of repute means that he is likely to damage the reputation of any regulated firm at which he is required to perform such functions;”
    • JF “poses a risk of damage to the reputation of, and public confidence in, the financial services sector.”

As a result, the FCA said it believed JF was not a fit and proper person.

Risk to the Public and Industry

The FCA also considered the risk more broadly that JF posed to the public and to the financial services industry.

The FCA said that JF “poses a risk to consumers” because “there is a risk that an individual who has demonstrated such a lack of integrity will treat consumers inappropriately and/or otherwise conduct his business in a way which puts at risk their interests.”

The FCA also said that JF’s:

lack of integrity and requisite reputation is such that he poses a risk to public confidence in the financial system… There is a risk of an erosion of public confidence if those who seek to exploit and breach the trust of other individuals and radically deviate from legal and ethical standards, or do not have the requisite reputation, are permitted to continue working in the financial services industry (emphasis added).

Ban

In light of the above – the concerns about fitness and propriety and the broader risk to consumers and the industry – the FCA said in the Decision Notice that it is appropriate to withdraw JF’s approval to perform senior management functions and to ban him from carrying out regulated activities. JF is (we understand) in the process of appealing that decision.

JF’s Defence

Annex B to the Decision Notice sets out several points that JF made in his defence and the FCA’s replies to those points. Firms dealing with similar or extrapolated points when judging the fitness and propriety of staff may find the FCA’s answers illuminating.

JF made various points about his integrity, reputation, and risk to others, including the following:

Integrity

On integrity, JF said that he regretted his action, had shown remorse, and that a conviction was just a “snapshot” of integrity at the time “and should not be relied on as the sole determining factor in understanding their whole character.” He pointed to “evidence going to his overall integrity, by way of character references and testimonials from clients and a family member….”

JF also said that his conviction had no bearing on his competence as a financial adviser, and that he had received no complaints about either his advice or his conduct.

The FCA, in reply, said it had correctly applied the fitness and propriety guidance. It had considered (among other factors): (a) the seriousness of, and circumstances surrounding, the offence; (b) JF’s explanation; (c) the relevance of the offence to the proposed role; (d) the passage of time since the offence was committed; and (e) evidence of JF’s rehabilitation. The FCA explained that these factors “need to be considered on a case-by-case basis” and that they did not need to be given equal weight. It was most appropriate, the FCA said, to give the most weight in this case to the seriousness of JF’s offence.

The FCA also noted JF’s remorse and regret but observed that JF’s sentencing judge had said that JF had shown “no remorse about his decision to meet a 15-year-old girl.”

The FCA also disagreed that JF’s conviction was irrelevant to his role as a financial adviser. The FCA related the two, focussing on the way that JF’s behaviour departed from legal and ethical standards, commenting:

Even though [JF’s] offence was not committed at work and did not involve financial dishonesty, it involved him deviating from legal and ethical standards and seeking to exploit those more vulnerable than himself, which in the Authority’s view is fundamentally incompatible with his role as a financial adviser (emphasis added).

If the decision is maintained, firms may find the emboldened language above a useful and flexible yardstick to assess the impact of nonfinancial misconduct on a person’s fitness and propriety.

Reputation

On reputation, JF argued that the FCA’s concerns about reputational impact were “speculative.” JF said that while “30 clients ceased to instruct [him] after his conviction,” he “remains trusted adviser to about 63.” He said that he had been working “post-conviction at Firm A for three and half years and there [was] no evidence of reputational damage to it or the financial sector.” The FCA rejected this, saying:

  • It was obvious that JF’s conviction caused JF to lose reputation and that it is “demonstrated by the negative publicity after he was convicted.”
  • JF changed his name and his firm following conviction, it contended, “to distance himself.”
  • One-third of JF’s clients left his firm following conviction.
  • JF did not proactively inform clients of his offence.

The FCA said there was a “risk of erosion of public confidence if individuals who have committed such misconduct and do not have the requisite reputation are permitted to continue working in the financial services industry.”

Criminal Justice System Controls

JF denied that he presented a continuing risk and/or that any risk was not already effectively controlled by criminal justice system measures that had been put in place post-conviction. JF referred to his indefinite Sexual Harm Prevention Order (the terms of which were “stringent” and, if breached, could see him receive a “maximum term of imprisonment of five years”). JF also argued that his sentencing judge had “concluded” that he “could be rehabilitated” but that any prohibition order by the FCA would “be curtailing that path to rehabilitation.”

The FCA disagreed. It referenced its statutory objectives to “manage the risk posed by those who lack the requisite honesty, integrity and reputation to hold controlled functions or work in the regulated sector.” It also said that the continuing criminal justice controls suggested there was a continuing risk that needed to be managed going forward.

Negative Impact on Others (Including Clients)

JF argued that banning him from the industry would be detrimental to a number of others, including his clients and himself. JF said that many people relied on him for their financial affairs and that clients “would have to switch to another financial adviser.” JF said that a ban “would also have a devastating impact on [his] financial position.”

The FCA rejected both arguments.

In relation to JF’s clients, the FCA agreed that if a prohibition order was made, his clients would need to find an alternative financial adviser: this would be “a natural consequence” and the FCA “would expect [JF] to have contingency plans in place.” However, the FCA said that “any inconvenience to clients” is “outweighed by the risk to consumers and to public confidence in the financial system of the Authority not taking action against [JF].”

In relation to the financial impact of a ban on JF, the FCA said its decision to ban JF had not been taken “lightly.” It was “appropriate… given its conclusion that [JF] lacks fitness and propriety and poses a risk to consumers and to public confidence in the financial system.”

Passage of Time Before Action Taken

JF also argued that he had kept the FCA informed of the criminal proceedings against him, including about his conviction, but that the FCA took many months before acting. JF suggested that this “lack of urgency” by the FCA undermined the need for him to be banned. He also pointed to the “three and half years” that had lapsed since his conviction without criticism, which was “evidence of good conduct.”

The FCA acknowledged that it could have taken action “sooner,” but this was ultimately not relevant to whether JF was fit and proper. It also took issue with JF’s account of his openness and transparency. The FCA went on to say that the passage of time, without criticism, was not sufficient to assuage its concerns about JF’s offending and surrounding circumstances.

Takeaways

As stated above, the facts are exceptional. Most firms will not be faced with similar scenarios. However, the Decision Notice, and the way in which it sets out the importance of nonfinancial conduct, particularly in relation to reputation and integrity, and the way it unpicks JF’s broad points of mitigation, is helpful. It may guide firms as to important points to consider, including the relevance of counterarguments such as the following:

  • That the conduct in issue is irrelevant to the regulated role
  • That consideration should be given to the person’s “overall” integrity
  • That the individual retains the trust and faith of (at least some) clients
  • The relevance of other potential risk controls
  • The impact on others
  • The passage of time

Subject to JF’s appeal, we also expect the FCA in future decisions on nonfinancial misconduct to repeat the turn of phrase, “deviation from legal and ethical standards,” to ground enforcement action.

Nonfinancial misconduct is a hot topic for the FCA and is set to remain so. FCA Executive Director Megan Butler’s famous letter to the Women and Equalities Committee in September 2018 was a watershed moment that showed that nonfinancial misconduct (particularly harassment) was squarely within the FCA’s sights. Since then, the FCA has continued to reinforce to firms that nonfinancial misconduct remains misconduct and must be considered when assessing fitness and propriety. Recent FCA speeches on diversity and inclusion and the encouragement of blowing the whistle “in confidence, with confidence” will also keep related topics of harassment, discrimination, and reporting to the FCA front and centre of the personal conduct agenda.

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Contacts

If you have any questions or would like more information about the subject discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Louise Skinner
Chris Warren-Smith
Lee Harding
Mel Ryan
Steven Lightstone
Thomas Twitchett