#Metoo in asset management

By Sarah Hitchins and Robbie Sinclair, Allen & Overy

Published: 18 January 2019

If there is one thing that we have learnt from the #metoo fallout, it is that no sector is immune from this type of misconduct. And it is telling that a range of industry bodies in sectors such as law, charities, construction and entertainment have been quick to issue guidance on dealing with these issues.

The Financial Conduct Authority (FCA) has made it clear that it views sexual harassment as an important issue. Its interest in allegations and findings of sexual harassment or other sexual misconduct about individuals who work for the firms it regulates is part of the FCA’s broader focus on culture within the UK financial services industry.

The FCA’s interest in this area is not new. Many firms (especially banks and building societies that are already subject to the FCA’s Senior Managers and Certification Regime (SMCR)) have been taking a more holistic view of misconduct for some time, recognising that non-financial misconduct (including sexual harassment and other sexual misconduct) can have regulatory implications. However, the issue has received considerably more public attention following the recent publication of a letter written by the Executive Director of Supervision at the FCA, Megan Butler, to the Women and Equalities Committee which emphasised the interest that the FCA is taking in relation to ‘poor personal misconduct, including allegations of sexual misconduct’.

It therefore comes as no surprise that we find ourselves being asked with increasing regularity how allegations and findings of sexual harassment or other sexual misconduct impacts firms and individuals from a regulatory perspective.

How will things look after the implementation of the SMCR?

The spotlight on individual accountability and overall culture will be intensified following the implementation of SMCR for FCA-only authorised firms, which will include alternative investment managers, on 9 December 2019. From this date firms will be turned into mini-regulators with responsibility for assessing the fitness and propriety of their Senior Managers and Certified Persons, as well as assessing potential breaches of the FCA’s Code of Conduct for almost all employees as and when issues arise. The FCA has made it clear that firms’ responsibilities in relation to these matters will extend to allegations of sexual harassment or other sexual misconduct.

Fitness and propriety

Some firms may have viewed #metoo type allegations as ‘HR issues’. That is not the FCA’s view. Even though this type of misconduct may not appear as relevant to FCA’s traditional areas of regulation in the same way as financial misconduct (e.g. misstating the value of a position), it is misconduct which the FCA still expects firms to consider from a regulatory perspective.

Even before the SMCR comes into force for alternative investment managers, allegations of sexual misconduct should be considered in light of the fitness and propriety requirements that apply to approved persons and the FCA’s Statement of Principle and Code of Conduct for Approved Persons (APER). With the introduction of SMCR, however, one of the factors that firms are required to consider when assessing the fitness and propriety of an individual is their ‘personal characteristics’. This criterion has led to firms taking a more holistic view of an individual’s suitability to perform a particular role, and has led to firms considering the fitness and propriety implications of some individuals’ ‘strong’ or ‘robust’ management styles, as well as allegations of bullying and non-sexual harassment. In the wake of the #metoo movement, allegations or findings of sexual harassment or other sexual misconduct now fall to be considered within an individual’s ‘personal characteristics’.

While the FCA has been clear that issues of sexual harassment should be considered from a fitness and propriety perspective, its guidance has been less clear on the action firms should take in relation to individuals who are implicated or potentially implicated in these situations.

Invariably, each allegation or finding of sexual misconduct has to be assessed on a case by case basis looking at all the circumstances including the individual’s role and relationship with the victim, the surrounding evidence and any explanation given. Bear in mind that, when looking at the factual matrix, the relevance of the misconduct to the role that an individual performs for a firm may be critical, given that a number of allegations made about #metoo type behaviour relates to the alleged abuse of power by a senior individual over a more junior individual. For example, take a senior male in a firm who holds a Significant Influence Function (under the current approved persons regime) or holds a Senior Manager or Certified Person role (under the SMCR) who manages numerous women. If he acted towards one or more of these women in a way that was sexually inappropriate, the FCA may view this behaviour as undermining his supervisory responsibilities, thereby calling into question his competence and capability and potentially also his integrity to carry out his role.

Obviously, the more serious the misconduct, the more likely that it will impact on an individual’s fitness and propriety and, in particular, their honesty and integrity. For example, committing sexual assault is a clear example of conduct that impacts an individual’s fitness and propriety, whereas a one-off comment made by an individual that includes sexual innuendo is likely to be less clear-cut. When misconduct arises (including but not limited to #metoo type misconduct), firms will often need to make nuanced judgement calls based on the specific facts. Developing a robust and consistent approach to assessing fitness and propriety in these situations is an issue with which banks and building societies are still grappling, almost three years after the SMCR came into force for them.

Wherever a firm comes out in relation to the fitness and propriety of an individual who is implicated in a #metoo complaint, it is important for a firm to carefully record the thought process followed in reaching that decision and the rationale for it.

APER and the FCA’s Code of Conduct

#metoo type misconduct which raises fitness and propriety issues will not, however, always amount to a breach of one or more of the Conduct Rules set out in the FCA’s Code of Conduct (which will come into force for alternative investment managers with the SMCR in December 2019). This is because, unlike fitness and propriety (which can take into account any conduct engaged in by a person), the scope of the Code of Conduct is narrower. It will apply to (among other things) activities that have, or might reasonably have, a negative effect on the integrity of the UK financial system or the ability of a firm to meet its own fitness and proprietary requirements. Although the FCA does not specifically refer to #metoo type misconduct when it defines the scope of activities to which the Code of Conduct will apply, the Individual Conduct Rules are sufficiently broad to capture this type of misconduct in some circumstances. The FCA has publicly reinforced that this could be the case. In her recent letter, Megan Butler confirmed that: ‘[s]exual harassment and other forms of non-financial misconduct can amount to a breach of [the FCA’s] Conduct Rules’.

From the starting point that #metoo type misconduct can fall within the scope of the Code of Conduct, the next question firms will need to answer is which (if any) of the Conduct Rules have potentially been engaged in a particular case. The FCA’s general and specific guidance relating to the Code of Conduct does not specifically refer to how conduct such as bullying, harassment and #metoo type misconduct should be interpreted under the Code of Conduct. However, the FCA’s guidance in this area is not intended to be exhaustive and, as a result, firms are left to come to their own views about which of the Conduct Rules may be engaged by #metoo type misconduct. The most obvious candidates are Individual Conduct Rule 1 (acting with integrity) and Individual Conduct Rule 2 (acting with due skill, care and diligence).

The activities that fall within the scope of APER are narrower than the activities that will fall within the scope of the Code of Conduct from December 2019 onwards. APER applies to the performance by an approved person of their controlled functions or in relation to the carrying on of regulated activities, whereas the Code of Conduct applies to a much broader scope of conduct, including unregulated activities. In light of this narrower scope, it is less likely that #metoo type misconduct could fall within the scope of APER.

What is clear though is that the FCA expects firms to consider whether misconduct (including #metoo type misconduct) falls within the scope of APER or the Code of Conduct and, if not, to record the reasons why. While firms may conclude for a variety of reasons that some (but not necessarily all) #metoo type complaints which concern events that took place outside of work fall outside the scope of APER or the Code of Conduct, it will be important for firms’ records to show how these decisions were reached and that a robust process was following in reaching them.

Linking tolerance of sexual harassment to a poor culture

We can now say categorically that the FCA is interested in allegations and findings of sexual misconduct, and that such misconduct (as well as other forms of non-financial misconduct) may form the basis for an adverse finding in relation to an individual’s fitness and propriety and potentially also their compliance with the Code of Conduct. #metoo misconduct can no longer be considered an ‘HR issue’ within financial services firms.

Addressing the Women and Equalities Committee in relation to their work on sexual harassment in the workplace on behalf of the FCA, Megan Butler felt confident in making a link between a culture where sexual harassment is tolerated and one ‘which would not encourage people to speak up and be heard, or to challenge decisions’. For the FCA, tolerance of sexual harassment is not only ‘a driver of poor culture’ but also a barrier to ensuring that firms retain their best talent and make the best business decisions and risk decisions.

Walking the walk

Not only is the FCA talking the talk in this area, it is walking the walk. Through Megan Butler’s letter, the FCA has made it clear that it has a number of tools to ensure that firms take allegations of sexual harassment and misconduct seriously. Her comments are very helpful as they give a degree of clarity in an area in which the FCA had previously been silent, particularly in the following:

Fitness and propriety: Sexual misconduct may have an adverse impact on an individual’s honesty, integrity and reputation for the purposes of assessing their fitness and propriety, in the same way that a criminal conviction can. Interestingly, findings of discrimination and harassment more generally may also have a similar impact on an individual’s fitness and propriety.

Code of Conduct: Sexual misconduct can amount to a breach of the FCA’s Code of Conduct when it comes into force for alternative investment managers from December 2019 (for Senior Managers and Certified Persons) and December 2020 (for all other in-scope employees). If a breach of the Code of Conduct is established, that breach must be reported to the FCA (within seven days in the case of Senior Managers). Whether sexual misconduct can amount to a breach of APER is less clear-cut, given its narrower scope.

Regulatory references: If a disciplinary sanction has been imposed on an individual in relation to sexual misconduct (or if an individual resigns when allegations have been made) this is something that a firm is likely to need to include on any regulatory reference provided in respect of that individual, regardless of what (if any) decision is taken about that individual’s fitness and propriety or compliance with the Code of Conduct or APER.

Whistleblowing: In addition to using a firm’s internal whistleblowing procedures to report allegations of sexual misconduct, the FCA has expressly invited individuals to raise such allegations directly with it through its whistleblowing procedure. The FCA said in Megan Butler’s letter that it would be particularly interested in any reports that indicated that a firm was ‘systematically mishandling allegations or incubating a culture of sexual harassment’.

And there’s more…

If necessary, the FCA has said that it will discuss allegations of sexual harassment and how such allegations are handled by firms in the course of its supervisory work, and that it will continue to focus on the issue in its strategic planning as well as its day-to-day operational work. So we should not expect #metoo to slip down the regulatory agenda for the FCA in 2019.

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