Non-Financial Misconduct Miniseries: Episode 2 – Employment Law Implications of the FCA’s New Rules

In episode two of Ropes & Gray’s Non-Financial Misconduct Miniseries, Amanda Raad, co-leader of the firm’s crisis management and global risk practices, and litigation & enforcement senior attorney Sarah Lambert-Porter are joined by Sharon Tan, partner at Mishcon de Reya, to examine the intersection of the FCA’s new non-financial misconduct (NFM) rules and employment law. During this second episode, they also discuss the evolving definition of non-financial misconduct, the draft guidance and factors relevant to NFM’s seriousness, and the implications for conduct in the workplace as well as in private life. The hosts offer practical guidance for asset managers, private equity sponsors, and other regulated firms on implementing multidisciplinary approaches, educating stakeholders, ensuring consistency in disciplinary processes, and preparing for the upcoming regulatory changes.

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Amanda Raad: Hi again, everyone. It's Amanda Raad. We are back today for episode two, looking at non-financial misconduct and the FCA's new rules in this space. And today, we are going to be focusing on the intersection of these new rules with employment law.

So, I'm joined again today by my amazing colleague Sarah Lambert-Porter. And we also have our employment law expert Sharon Tan with us today. And we're going to take a dive into what the rules are, which we've done a little bit about already, but what is the employment law spin on this and what do we all need to be thinking about.

All right. So, let's dive straight in. We talked last time on episode one about how the FCA got here and why the FCA is focusing non-financial misconduct, what that actually looks like in practice. But since we have the privilege of having Sharon with us today, can you just start at the very basics, Sharon? What really is non-financial misconduct? What are we talking about when we use this phrase?

Sharon Tan: Thanks, Amanda. It's a really good question. So, prior to this, we haven't actually had a definition of what constitutes non-financial misconduct. But as of the first of September, 2026, we are going to have a definition. And it's going to cover unwanted conduct towards an individual that has the purpose or the effect of violating that individual's dignity or creating an intimidating, hostile, degrading, humiliating, or offensive environment for that individual.

And now that's obviously quite a mouthful. But for those who have spent years working in the employment law space or the HR space, that definition will sound quite familiar because it's very similar to the definition that we have for unlawful harassment in relation to the Equality Act.

The big difference of course in this context is that you don't need to have a protected characteristic such as somebody's gender, for example, in order to find yourself on the wrong side of having committed this form of misconduct. It would therefore cover bullying, for example, even if there was no discrimination angle to it.

And what's interesting as well is, again, harking back to the employment law world, is that in looking at this definition it's got both a subjective and an objective angle to it. So, when we talk about whether it created a hostile, intimidating, degrading, et cetera, environment for the individual, there is a subjective question as to whether the individual subjectively felt that way. But there's also the stress test of whether it was objectively reasonable for them in all of the circumstances to feel like that.

Amanda Raad: Given that it's such a broad definition, Sharon, where's the threshold for something actually being serious enough? I understand there's both a subjective and objective requirement, but what is it? Where is the threshold?

Sharon Tan: It's a very good question. Because, I mean, it's one thing to have non-financial misconduct. But in the context, of course, of the FCA's purview, the question that arises is when it equates to a breach of the Conduct Rules. And obviously, one of the key Conduct Rules that's going to be sharply in focus with all of this is the requirement that regulated individuals act with integrity.

And the FCA's proposed guidance, which is what we have at the moment, indicates that there will be a breach of this conduct rule if an individual retaliates against somebody for either using the firm's whistleblowing procedure or for complying with their own regulatory obligations to be open and cooperative with the regulator or to make appropriate disclosures to the regulator.

So, all of that will equate to a breach of the Conduct Rules and will amount to non-financial misconduct. But outside of that, you will also have a breach of the conduct rule if the non-financial misconduct is serious and involves a lack of integrity. Those are the two key components.

Sarah Lambert-Porter: I think it's also worth pointing out that a serious non-financial misconduct in that sense can be a breach of the Conduct Rules even if it's not directly tied to the regulated activity that the person is involved in.

Amanda Raad: Yeah. Thanks, Sarah. Can we expand on that just a little bit? So, I imagine that you're suggesting that conduct that happens outside of the typical job performance or maybe conduct even in private life could be pulled into scope. Is that right?

Sarah Lambert-Porter: That's right. Have been a couple of cases and enforcement actions by the FCA that make that quite plain, which is: off-duty or private conduct can still affect your personal fitness and propriety. And that is going to be particularly the case if the misconduct in some way betrays a lack of integrity or if it is persistent. Those are the sorts of things that are likely to have ramifications for fitness and propriety.

Amanda Raad: And you mentioned a couple of cases. Can you just give us a flavor for kind of the types of issues that may meet that seriousness threshold?

Sarah Lambert-Porter: So, the FCA has taken enforcement action in recent years that give us a sense of the way in which failings or misconduct outside of regulated activities and outside of the workplace can really bring integrity into question.

And so there was one quite well-known case a few years ago where the individual was convicted of child sexual grooming and convicted and served some time, but the FCA took action against him not only because of his lack of integrity but also because he failed in his obligation to be open and transparent with the FCA in failing to inform the FCA about his arrest and his conviction and so on.

So, there are a number of cases similar to that where things that happen outside, if it is a serious offense, if it is serious misconduct, even though it's got absolutely nothing to do with an individual's ability or carrying out of regulated activities per se, it can still impugn their integrity to the point where the FCA will take action.

Amanda Raad: Thanks, Sarah. And, Sharon, turning back to you, I think you were going to help us understand a little bit more about the technical definitions and application of what is serious misconduct.

Sharon Tan: Yeah. It's a good question, Amanda, because, as you say, "serious" can mean a whole spectrum of things. And Sarah, I think, has alluded to some fairly obvious, very serious, extreme scenarios where it's clearly going to be categorized as in that category.

But there are many situations where it will fall to employers to determine whether the behavior in question is something that reaches the regulatory standard or whether it's regular misconduct that HR would normally deal with, perhaps with an investigation and a warning or something like that that doesn't really cross over into this world.

And it isn't always a binary or an easy question to answer because of this tension potentially between the regulatory framework and the employment law framework as well. I think it's really worth pausing just for a moment to say that I don't think it's necessary to align your regulatory and your HR policy definitions particularly, given the nuances and that tension, but going forward, it's going to become a little bit more difficult for employers because they're going to need to be mindful of the differences between the two regimes and they're going to need to have more of a joined-up approach, to, I think, in future, between HR, compliance, and the legal.

And I think coming back to this question you asked quite rightly, Amanda, about what is serious or serious enough for these purposes, we do have some draft guidance from the FCA that's intended to help employers assess what crosses the bar and what doesn't.

So, the sorts of examples they've given us that would tip something into the ‘serious’ bucket include, for example, conduct that is part of a repeated pattern of behavior or a scenario where the perpetrator has been warned or disciplined in the past for similar behavior.

Other things that they've listed are scenarios where the victim has particular vulnerabilities, or where the perpetrator is very senior, or pertinently, where there is a disparity in seniority between the perpetrator and the victim: especially so in circumstances where the perpetrator has the ability to influence the career of the victim.

And, again, coming back to the employment law world, I think if you're dealing with a situation where the misconduct is such that dismissal, termination of employment would be justified, then you're certainly going to find yourself over the regulatory threshold as well.

Amanda Raad: Thanks for pointing out kind of the key stakeholders that need to be involved, at least early on, in deciding kind of the level of investigation, the investigation, and then the potential remediation. And we've talked about HR. We've talked about compliance and legal.

And maybe I guess a question for you: Is the suggestion perhaps that those key stakeholders should be joined up regardless from the beginning because it's not always clear what is serious and what isn't, and to make sure that you're taking a robust enough approach before you've actually done all of the fact finding? How should companies think about that?

Sharon Tan: Yes. I mean, I do think there is going to be more of a multidisciplinary approach to handling these issues on a go-forward basis because firms are going to have to have an eye, as they always have, on the employment law considerations. Are they conducting a fair investigation, a fair process?

Are they complying with any sort of procedures that might apply, if they're looking at terminating somebody's employment? And perhaps same set of facts, different lens. The compliance and legal team may well be looking at, "Have we got a reportable issue? Is this something we need to be flagging with the FCA? How serious is it, and what are the timing implications on that front?" Again, over to you and Sarah on this one, but I imagine there are very short time frames when they sometimes need to be involved.

Amanda Raad: Sarah, do you want to add anything on that perspective, on just the practical implications of needing to make sure that the compliance and legal team is informed from the beginning and part of the discussion early on?

Sarah Lambert-Porter: Yeah, I think it's really important that everyone is joined up from the outset. From a regulatory standpoint really, I think that the key here is proportionality and making sure that not every incident of non-financial misconduct is going to trigger a regulatory concern.

But certainly, it needs to be something that is considered from the outset. Particularly if it's something that is likely to undermine integrity or public confidence, firms really should be assessing it carefully from the very earliest point possible, and documenting their determinations, including the sanctions that are reached – so, why it's a final warning here, versus a termination there – and linking it back to the risk factors and the behavioral expectations that we've seen coming out of the FCA.

So, the arc really that we can see over the recent years is towards the clearer nexus points being made and really translating internal investigations and disciplinary matters into regulatory language. So asking ‘does what's happened breach the Conduct Rules?’, ‘does it impugn someone's honesty or integrity?’, and going from there? Which really does, as Sharon said, require a joined-up approach.

Sharon Tan: I think the point that you mentioned about integrity is really important as well, Sarah, because we talk about seriousness, but you're only going to find yourself in a regulatory concern if you also have a lack of integrity. So, it needs to be serious, as discussed earlier, but there also needs to be this lack of integrity.

And you have a lack of integrity for these purposes if the conduct is deliberate or reckless. There is a bit of a get-out-of-jail-free card, as it were, that's available because the perpetrator could say that they thought that they had a good and proper reason for the conduct, and the effect was proportionate to the aim of the conduct, and they weren't reckless, which in some ways is a fairly broad-brush defense to it, but I think is something that's going to be examined quite critically. And, again, it sort of harks back to the discrimination regime, where you can potentially objectively justify conduct or unlawful behavior if there is a good reason for it.

Amanda Raad: We talked very briefly about there being situations outside of the work setting and in private life that are relevant for our discussion here today, and we've talked about that in the context of fitness and propriety. Sharon, can you just expand on that a little bit for us?

Sharon Tan: Yes, of course. Glad to. You're absolutely right, Amanda, to say that fitness and propriety is still absolutely front and center of this. And it is worth bearing in mind that just because non-financial misconduct isn't caught by the new rule and the definitions that we've been talking about, it doesn't mean that it's going to be irrelevant from a regulatory perspective.

So, it could still be relevant when you're dealing with senior managers and certified staff, for example, for the purposes of assessing fitness and propriety, if somebody were, I don't know, caught stealing in the office, for example. Sarah talked earlier about people's private life and some fairly egregious scenarios where we've historically seen the FCA say that that has an impact on their fitness and propriety.

And I think it's really just worth pausing on that for a moment because it's clear that something that happens in the workplace is likely to be squarely in scope from a regulatory perspective, but there is a question, which really is: how far does this new regime extend into individuals' private lives, as you say, and what does the FCA expect firms to do in that respect?

I think it's fair to say that the FCA doesn't expect firms to monitor or investigate people's private lives. They do, however, expect firms to take appropriate and proportionate action if they become aware of issues in somebody's private life that might have regulatory ramifications, particularly for fitness and propriety.

And that's kind of consistent with the line of cases that we saw historically, and it's really been carried further into the guidance that we have now. So, you know, really egregious scenarios where somebody has behaved appallingly in their private life would have a bearing understandably on their fitness and propriety.

And in fact, the guidance we have from the FCA at the moment goes further than that, and says that it's not just conduct of this extreme nature that will be potentially relevant for these purposes. If you have somebody in their private life engaging in conduct that involves a regulatory breach or that demonstrates some sort of willingness to disregard their ethical or their legal obligations, then that's the sort of thing that may come in to affect their fitness and propriety in the FCA's assessment of that too.

And this is really also bound up too, I think, in the other side of the coin for all of this, which is that there is a duty on managers to prevent this stuff from happening. And so, historically, it was perhaps easier for firms, for employers, for managers not to actively look at these things, or for people potentially to exit before they were investigated, but these days, or looking forward as of September next year, it's also going to be a potential breach of the Conduct Rules for a manager to know that non-financial misconduct is taking place and to willfully ignore it, or, for that matter, to fail to operate the businesses under their purview in a way that detects non-financial misconduct.

Amanda Raad: You say that there's no duty to go investigate people's private lives, but presumably if a complainant brings an allegation forward that mixes perhaps some business with some private that the complainant is aware of, then is there perhaps – because it is within the knowledge and related to the complainant issue – some duty to take a further look and assess those facts?

Sharon Tan: I think it could be. Yes, certainly. I think it depends on what the misconduct involves. As I say, the historical stuff that we've had, the really egregious behavior, the answer to that would be yes. If, as I say, it were something that went to a potential regulatory breach – I can't think of one off the top of my head – maybe just the way they deal with their personal banking perhaps. I don't know; maybe you can think of better examples? Then that's the sort of thing that, yes, I think in theory they would need to potentially look at. You at least need to ask the question as to whether you could or should investigate it, recognizing that your ability to do so when it extends into somebody's private life is arguably much more difficult.

Amanda Raad: What role does social media play in all of this?

Sharon Tan: Yes. I mean, as you say, a very practical question. And there's obviously a crossover with all of this between employment law, behavior in the workplace, behavior from a regulatory framework, and people's rights in their private lives to express an opinion, to have a private life, and all of the rest of it. And the purpose of this regime isn't obviously to prevent people from expressing even controversial views. The FCA does, I think, recognize that individuals have a right to do that, and that doesn't necessarily affect their fitness and propriety, but where the line can be crossed, and what employers I think need to be watchful for, are situations where somebody posts something – a regulated individual posts something – that demonstrates a real risk that they might be willing to breach the regulatory obligations that we've been referring to; or, again, coming back to this touchstone of having something that would indicate a willingness to disregard their legal or their ethical obligations. It kind of comes back to that notion of fitness and propriety and honesty, integrity, and all of that sort of thing, but, as I say, it doesn't cut across free speech as such.

Amanda Raad: Excellent. Thanks very much. Shall we move on then to what companies should actually be doing now, what they can do now to start preparing? Sarah, can you tell us where we should start to think? I know we have technically until the 1st of September 2026, but there's plenty of things that can be done now in the interim.

Sarah Lambert-Porter: Yeah, sure. So, I think a starting point really could be to start assessing and taking steps in relation to culture and training around non-financial misconduct. The focus here might initially be on senior managers in particular because they begin the culture cascade throughout the organization.

So in addition to what Sharon said about the duty to prevent sexual harassment in the workplace, which has been in force since October of 2024, I think it's really important to make sure that senior managers and approved persons within the organization understand that personal behavior and not just professional performance is part of their fitness and propriety testing and that leaders really do need to narrate the standards expected throughout the firm and the consequences that there would be for people who fall below those expectations.

The essence is that people copy what is rewarded and what is tolerated. And so, firms can think about doing scenario-type training for managers about dignity, respect, and sexual harassment in the workplace and how to escalate matters and deal with matters. And all of that can help to build some sort of muscle memory before a crisis actually hits.

And that all goes to this encouragement of a speak-up culture, which firms should also be focusing on. I think the FCA's 2024 survey, which we mentioned in the last episode, 74% of firms said that they had at least one bullying or harassment complaint in the past year. So that shows just quite how widespread this is and how firms need to be aware of murmurings and communications within the firm, whether those are formal in the sense of whistleblowing reports or informally, so, you know, just chitchat near the water cooler.

And there are different ways to measure culture, and we're going to have a whole episode on it with our cultural psychologist. But there are a wide range of options for culture surveys that firms can be doing to assess where they are at the moment in relation to non-financial misconduct as well. But the upshot is that it's doing something more than your straightforward employee engagement survey that just asks a bunch of questions – you've really got to try and get more into the psychology of the firm if you can.

Amanda Raad: Yeah. And I'm so glad you mentioned that, Sarah, because I think we hear questions sometimes about, ‘Well, is that kind of deep dive review just a nice-to-have, or is that really something that you need?’ And we will talk about it more, but in order to really diagnose an issue sufficiently to be able to think about how to change behavior or how to change conduct you have to have an understanding first of what is actually driving the behavior or conduct that you're trying to modify in the first place.

And so, when we used the phraseology "culture survey" or "culture review" as compared to an employee engagement survey or some of the other more traditional means of looking at this, that's really what we're talking about: is trying to understand the why behind the kinds of issues that we're looking at. So, I think this is a really great place to bring that in, and I'm looking forward to that discussion. Sharon, what about you? What should people be doing now?

Sharon Tan: I think there's a real education piece actually for those who are going to be at the coalface of dealing with a lot of this because they carry a lot of the responsibility for the organization. On the HR front, I think we've alluded previously to the multidisciplinary approach that I think will be needed and the need to collaborate in future with compliance and legal probably at an earlier stage, but I think there's also sort of an education piece in terms of the ambit of who a whistleblower is for these purposes because there is a specific employment law definition of who a whistleblower is, and that is narrower than the definition that we see in the regulatory context. And we talked a little bit earlier about the importance of there not being any retaliation against whistleblowers or against people who are complying with their own obligations from a regulatory perspective because that in and of itself is going to be non-financial misconduct.

But I think that there is an education piece there to make sure that everybody understands that it's important to be very aware in practice and live to the fact that there really shouldn't be any retaliation against anybody, even if it's not a technical whistleblowing from an employment law perspective, that HR may be used to looking at.

I think another couple of things that are worth sort of thinking about, too, are your disciplinary sanctions and approaches, just to have an eye on consistency. Because clearly while nobody is going to prejudge the outcome of any disciplinary process, as in all of these things it's important to make sure that there is no differential treatment, particularly as between different individuals who may have different characteristics such as gender, disability, race, et cetera.

None of that's new. That's clearly been around for a very long time under the Equality Act, but the stakes I think are very much raised with the reporting obligations to the FCA, with the increased scrutiny. And I think it's important for everybody to recognize that the ramifications for an individual who's regulated are potentially huge, and if we don't have a consistent approach with the result that somebody ends up being unable to pursue their career because of the sanctions from the FCA, then you could end up with a very big potential liability in the form of a discrimination claim, amongst other potential claims, if we don't ensure that we are able to properly explain why we did something in a particular way.

So, there's a bit of a process and a bit of an education part to it. And I think there's also a bit of an eye on just making sure that people are alive to the need for consistency, and they have it front and center of mind.

Amanda Raad: Sharon, thanks for pointing out the education piece in a bit more detail and the things that we really need to focus on, making sure people are aware of. But who are the people that really need to have this education across organizations?

Sharon Tan: In some ways, there are some common themes that will apply to everybody because the regime is the same. It's incumbent upon firms and employers to educate people, as I'm sure they will be doing across the piece, as to what the obligations are and what the FCA will regard as of next September as constituting non-financial misconduct.

I suppose at a more granular level there are probably different levels of education and deeper dives for some functional responsibilities than others. Clearly, the further up the food chain you go, the more responsibility the individuals have. And so, we talked a little bit, I suppose, about it being potentially non-financial misconduct for a manager to stick their head in the sand, as it were, and not to intervene, to stop non-financial misconduct if they know it's going on. So, I think there's probably an education piece for them.

I think all the way down to much more junior people, they will want to understand what it is. And then whenever you get into the functional role such as HR, compliance, et cetera, I suppose there's more of a technical analysis that they will need to get in terms of education and also the process bit that sits around it in terms of investigations: how the investigation framework needs to be changed, if at all; ‘Do we need to make sure that we are preserving evidence, creating paper trails?’

And I think that last point actually is quite important, too, if I may pick up on that, because people in these roles on behalf of firms are going to have to make a judgment call going forward. ‘Do we report to the FCA? If not, why did we decide not to do that? What were the particular factors that we weighed in the balance?’

And I think it's going to be very important to make sure that you keep contemporaneous records of that thought process, not only – as we've always done in the past – from an employment tribunal perspective to make sure that you can defend against any claims that may later come out of the woodwork, but also, too, now from a regulatory perspective.

And I think it's important just to bear in mind that that kind of evidence-led explanation for why you have done something (report, not report; discipline, not discipline) is important not only vis-à-vis the FCA – who may well hold your feet to flames and say, ‘Well, why did you decide it was appropriate not to tell us about this, to explain yourself?’ – but also vis-à-vis potential employees, who may as a result of all of this end up being either ex-employees or in a worse position. And if they decide to bring a claim against you, be it for unfair dismissal, be it for unlawful discrimination, breach of contract, whatever it is, the burden will oftentimes be upon the employer to explain why it acted the way it did. And it's really important with that in mind to make sure that everybody is educated and trained in the need to make sure that contemporaneous notes and explanations are kept in written format so they are there to protect the organization going forward if needed.

Sarah Lambert-Porter: I think that's a really good point, Sharon. And I think it's easy to lose sight of the fact that the disciplinary inconsistency also effectively creates regulatory inconsistency. And firms' credibility with the FCA really does depend on coherent internal decision making, so documenting it is really important not only for keeping consistency across the firm's decisions but also for making sure that the FCA then can also take consistent decision.

Amanda Raad: Let's do our final takeaways. And for me, I think my final takeaway is maybe quite similar actually to the one I had on our first meeting, which is: the time is now. Even though we're waiting until next year to have the final rules in place, there's so much that can be done right now with regard to education; understanding conduct and designing and implementing processes to make sure that we address the conduct, investigate the conduct appropriately, and have the right documentation in place. So, I think the time is now. What about you, Sarah? What's your key takeaway?

Sarah Lambert-Porter: So, I think my key takeaway is that change is an opportunity. This is a chance not only to strengthen your compliance frameworks by doing things like embedding behavioral checks into your annual certification and your senior manager fitness and propriety assessments but also to make sure that you're properly leveraging data in your firm so that you can cross-check and make sure that your assessments are accurate and also, I guess, just to ensure that the culture and trust within your firm is where you think it is and in fact where it should be and where the FCA would expect it to be.

Amanda Raad: Thanks, Sarah. Sharon, what's your key takeaway?

Sharon Tan: I think for me the key takeaway really is that this new regime is as much about preventing these issues from arising as it is dealing with them when they do arise. The FCA has, I think, had front and center of its mind the notion of fostering a healthy culture, as Sarah says, and it isn't really about changing the employment law regime per se, but I do think it's going to require some more sophistication and collaboration when dealing with HR matters going forward because employers are now going to have to juggle these two overlapping frameworks.

So, yeah, a bit more nuanced, potentially greater consequences in terms of the ramifications for somebody losing their regulated status with this new lens that we're looking at everything through. And, yeah, I think if employers get it wrong it could lead to claims for career-long loss, so, it does raise the stakes, but, as I said, I think a lot of it really is about prevention rather than cure.

Amanda Raad: Thank you so much. And thank you both for the great discussion today. We'll make sure to put additional information in the show notes, including how you can find all of us for further follow-up questions. And you can listen to the show anywhere you usually listen to podcasts. And we look forward to seeing you back for our next episode. Thank you very much.