Non-financial misconduct: FCA Conduct Rules and ‘Fitness and Propriety’

In previous articles in this series we have looked at two important issues around non-financial misconduct (NFM): the approach to take when ‘off-duty’ misconduct impacts work (see here); and how allegations of NFM should be fully and properly investigated (see here).

In this update we consider how an employee’s NFM may impact or interact with Fitness and Propriety Assessments for firms and their staff, and when NFM might constitute a breach of FCA Conduct Rules.

A new focus on NFM

In October 2024, the Financial Conduct Authority (FCA) published findings from its Culture and Non-Financial Misconduct Survey, revealing widespread issues of bullying, discrimination and harassment within the UK financial services sector (see here: Culture and non-financial misconduct survey – findings | FCA)

This ongoing focus on workplace culture was reinforced last month (February 2025), when the FCA’s Chief Operating Officer Emily Shepperd delivered a speech highlighting the persistence of non-financial misconduct across the industry (see here: Culture is contagious | FCA).

This marks a fundamental shift in regulatory priorities. Historically, financial services oversight has focused primarily on financial behaviours such as fraud, or market abuse. Now, the FCA has made it clear that a firm’s internal culture is just as important to its overall compliance, and that it considers non-financial conduct to be ‘relevant to assessments of fitness and propriety’ and may also potentially amount to a breach of the conduct rules.

Fitness and Propriety

Fitness and propriety of FCA regulated employees is assessed by reference to honesty, integrity and reputation; competence and capability; and financial soundness.

Once the FCA or a firm has established that an individual is fit and proper to perform a specific role at the outset of their employment, that individual must continue to remain fit and proper on an ongoing basis.

The FCA has made clear that allegations of non-financial misconduct may have implications for the relevant employee’s ‘fit and proper assessment’ both for the purposes of annual certification and for the purposes of ascertaining an ongoing basis that the person is fit to continue to perform their role.

The FCA treats non-financial misconduct as potentially relevant to honesty, integrity and reputation and, in some cases, competence and capability. How a firm, and individuals within that firm, handle NFM is seen as indicative of culture, and whether sound business choices and risk management decisions are made. Non-financial misconduct is therefore a key focus for the FCA's supervision of firms and of senior managers. Notably, a failure to take reasonable steps to address non-financial misconduct may lead to a determination that a senior manager is not fit and proper.

There are numerous examples of enforcement action taken by the FCA against regulated employees, from relatively ‘minor’ offences such as fare evasion (considered to be relevant to honesty and integrity) through to very serious violent or sexual offences.

Looking at past enforcement action holistically, it is difficult to identify any ‘bright line’ beyond which behaviour in an employee’s personal life is deemed to impact their professional suitability and to what extent, if at all, regulatory action may be warranted for misconduct outside work.

For this reason, in its Consultation paper, the FCA proposes amendments to the ‘fit and proper’ test to clarify its position on NFM. While each case will turn on its own facts, and an element of judgement will always be involved, the aim is to smooth out any inconsistencies in how rules around NFM are interpreted and applied, both by firms and in judicial settings (if a regulatory decision comes under the scrutiny of a tribunal).

Under the proposed amendments to the rules: “misconduct in a person’s private or personal life or in their working life outside the regulatory system may be relevant to their fitness and propriety even though it does not involve a breach of standards that are equivalent to those required under the regulatory system. In particular it may show that the person lacks moral soundness, rectitude and steady adherence to an ethical code. That in turn raises doubts as to whether they will follow the requirements of the regulatory system.”

The proposed rules also clarify that “disgraceful or morally reprehensible or otherwise sufficiently serious” may be relevant to fitness and propriety even if it does not damage public confidence in the financial system or there is little or no risk of it being repeated in the individual’s work for their firm. It remains to be seen whether these amendments will be introduced and, if so, how they will be applied by the FCA.

Breaching the Conduct Rules

Cases pursued by the FCA to date have tended to focus on whether individuals who have committed NFM offences remain ‘fit and proper’. While this will likely continue to be the main basis on for addressing NFM, the FCA Consultation Paper makes clear that it may also be able to take action to address a breach of the Conduct Rules.

The Conduct Rules in the current FCA Handbook include a non-exhaustive list of conduct that might breach standards, highlighting dishonest or misleading conduct in the context of providing financial services, such as misleading clients, the regulator or others in the firm. However, it does not currently make any express reference to NFM.

The FCA proposes changes to clarify that the Conduct Rules cover serious instances of bullying, harassment and similar behaviours towards fellow employees, employees of group companies and contractors. The proposed examples of NFM are broadly drafted, for example ‘seriously offensive, malicious or insulting conduct’ or ‘unreasonable and oppressive conduct causing serious alarm or distress to a fellow member of the workforce’, arguably bringing a very wide range of behaviours within the scope of the Conduct Rules.

However, although the net is case widely in this respect, it appears that the circumstances in which NFM is likely to breach the Conduct Rules may be limited. There will need to be a sufficiently close connection between the NFM committed and the work being done, including the functions and responsibilities of the individual and the activities carried out by the firm. This echoes the approach currently taken by the FCA to financial misconduct issues, whereby the current Conduct Rules generally apply narrowly to regulated activities only, and in all cases require a close nexus to the performance of functions by the employee related to the firm’s activities.

Comment

The newly proposed rules and guidance indicate that the FCA considers NFM highly relevant to assessing fitness and propriety, especially for more serious offences. However, in relation to the Conduct Rules, it is envisaged that NFM will primarily only be relevant if it occurred in a workplace or business context.

Many firms will welcome clarity around the relevance of NFM to regulatory matters, given the difficulty of ‘learning lessons’ from past FCA decisions (in which written rationale tends to be very brief, and which often go unchallenged by the employees involved).

The proposed amendments (if brought into force as drafted) signal a narrowing of the gap between HR matters and regulatory matters in the financial sector. A joined-up approach between people functions and professional financial functions will be required to ensure that standards are upheld and FCA expectations are met.