Conduct & Culture
Non-financial misconduct rules will drive ‘lawyering up’ of human resources activity
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July 9, 2025
Plans by the UK Financial Conduct Authority (FCA) to provide guidance on and extend non-financial misconduct rules to non-bank firms will lead to more legalistic human resources processes, experts predict.
Individuals accused of wrongdoing, as well as their alleged victims, may “lawyer up” for support in navigating financial services firmsʼ sometimes flawed disciplinary processes.
Experience shows that firms often do not make work environments safe, according to Arpita Dutt, an independent workplace investigator and mediator at Arpita Dutt Consulting in London, and it can be difficult for employees reporting non-financial misconduct to have confidence in internal processes, because they bear the burden of establishing that an incident occurred and cannot always rely on witnesses coming forward.
She explained that the investigation process can disadvantage those reporting non-financial misconduct. “The moment an investigation starts [complainants] are told ‘you need to keep this investigation confidentialʼ. And the first thing [they] say is ‘Well, hang on a minute. Does that mean I canʼt speak to anybody about it? How am I going to get my witnessesʼ? And it becomes a very closed process, which makes it very difficult for them to speak to witnesses, and for others to feel protected if they do come forward.”
Until now, the lack of guidance around bullying and harassment enabled firms to keep their heads down and hope the regulatory consequences of misconduct would go away, said Sam Clyndes, a barrister and director in Fieldfisherʼs financial regulation team in London.
“People may not have instructed external counsel because everyone was in a degree of ignorance or uncertainty around the level of risk that each different party faced. Whereas now, as the guidance presents the position more clearly, the additional information may engender extra understanding and a bit of extra fear and this may drive parties towards seeking legal advice,” he said.
Faster disciplinary processes
The proposals announced last week to amend the regulator’s Code of Conduct rules (COCON) and Fit and Proper assessments should also speed up internal disciplinary processes at financial firms.
The FCA has decided to align its rules more closely with UK employment law, after reviewing responses to its 2023 consultation. Dutt believes this will clarify for employers whether an employee’s behaviour breaches the regulators conduct rules. “The [FCA] have aligned [COCON] more with employment law. There was a divergence in the previous explanation, and what that means is that they have now focused on the violation of dignity, the impact, the effect of the conduct on the individual as quite a significant factor,” she said.
Emma Parry, founder of conduct risk advisory firm NovaFin Consulting, also believes the regulatorʼs proposals will lead to cases being resolved more quickly.
The FCA said it received strong support (80%) for its non-financial misconduct proposals in its 2023 consultation, and FCA deputy CEO Sarah Pritchard said the rule change will bring “consistency across the financial sector”. Set to commence in September 2026, it will also extend the requirement to monitor workplace non-financial misconduct to another 37,000 FCA authorised firms.
Payments and e-money firms will remain outside the new regime, however, because a change in primary legislation would be needed to apply the FCA’s senior managers and conduct regime (SMCR) — and thus the new non-financial misconduct rules — to payments firms.
Guidance welcomed
Pritchard said the FCA had focused its guidance “on the areas that make the most difference”, which she claimed would keep compliance costs down for firms.
The guidance will be useful and welcome, especially where it addresses some of the questions arising repeatedly, said Clyndes at Fieldfisher.
“Non-financial misconduct has been going on this whole time, even though weʼve been in this interregnum without the guidance, and we deal with it a lot. The main things that people always want to know is, what do we tell the regulator? When do we tell it? And if weʼre getting rid of the person, what do we include in their regulatory reference?” he said.
Parry, a former head of product governance and conduct at HSBC with experience of overseeing internal disciplinary hearings, also welcomes the regulator’s clarification of its expectations and its offer of guidance.
The need for the latter was underscored by the findings of an FCA survey published last year. Among other things, it found that some firms — confused over what constituted non-financial misconduct — were including relatively trivial office grievances alongside serious instances of workplace bullying and harassment.
The survey also identified a minority of firms without a whistleblowing policy — despite FCA SYSC 18 rules requiring this since 2016.
All affected firms must update their policies, and roll out communications and updated mandatory training, said Parry.
“They must also provide guidance to managers on the actions they must take if non-financial misconduct occurs in their teams (including documenting of discussions and warnings to the relevant perpetrator),” she added.
“Whether lawyers are ultimately brought in or not, as in any disciplinary, the firm must have a robust and documented audit trail of evidence (eg, emails, eComms surveillance, witnesses) and must be able to clearly articulate the regulatory breach that has occurred. The clarified non-financial misconduct obligations should provide greater clarity and certainty for firms.”
Timeline of a policy
The FCA first proposed clarifying rules around non-financial misconduct — alongside plans to collect diversity and inclusion data back in July 2021 in a joint discussion paper with the Prudential Regulation Authority (PRA). This was followed up with consultation paper 23/20 in September 2023.
However, in March 2024, the Treasury Committee the committee recommended that the regulators “drop their plans for extensive data reporting and target setting” in its Sexism in the City report. The FCA subsequently abandoned its plans to collect D&I data in March 2025.
This month, the FCA published a policy statement and consultation paper 25/18 setting out its expectations for how non-financial misconduct should be handed by individuals and firms under its Code of Conduct and Fit and Proper rules. These changes are set to come into force in September 2026. .
Annex B of the CP25/18 sets out the amendments to COCON that detail what the FCA considers “reasonable steps” might look like for a manager. All managers are also reminded that they have a responsibility for “developing and embedding healthy cultures in their areas of responsibility”.
In short, managers who ignore or downplay serious non-financial misconduct risk the FCA taking action under its FIT regime.
Notifiable
Firms will now be required to notify the regulator when an internal disciplinary procedure concludes that an individual has committed serious non-financial misconduct. As part of their Principle 11 obligations, they should also inform the regulator when a case involving serious non-financial misconduct commences at an employment tribunal, and update the FCA on its outcome.
“The important people [are] the people on the [internal] disciplinary panel, who have to decide whether this amounts to serious or gross misconduct, and what the sanction is. At that point, they really are the arbiters. They will determine whether it is potentially a notifiable breach that goes into other considerations, such as the FIT considerations,” said Dutt.
This is not all new, she added. “Employment lawyers know exactly what this terrain is. HR should know. It requires good, rigorous investigations to get to the truth of the matter on these particular issues of violation, impact and effect.”
Reported and written by Lindsey Rogerson & Rachel Wolcott.
Read the other article on the FCA’s new approach to non-financial misconduct here.