The FCA has issued its rules for non-financial misconduct (NFM) and published CP25/18 "Tackling non-financial misconduct in financial services". CP25/18 includes a policy statement with final rules on NFM for non-banking firms as well as a consultation on proposals for additional guidance in the conduct rules source book, COCON and the fitness and propriety sourcebook, FIT of the FCA Handbook.
The FCA first consulted on NFM as part of its diversity and inclusion proposals in September 2023.1 In March this year however, the FCA announced that it had no plans to take its work on diversity and inclusion further, except for in relation to its NFM proposals.
Navigating NFM inevitably presents challenges and firms will always need to apply careful judgement in their approach. However, the revised rules establish more defined parameters regarding matters which will fall within the regulatory framework. We set out below the top ten things you need to know about the incoming and the proposed changes.
Incoming rules: extension of NFM to non-banking firms
- Rule change: With the aim of increasing
consistency across the industry, the Policy Statement introduces a
new COCON rule (COCON 1.1.7F R) which will widen the scope of COCON
for non-banks to bring more instances of NFM into the regulatory
remit.
- Definition of NFM: Conduct will constitute NFM
within the scope of COCON and therefore a potential breach of the
Conduct Rules where it is: (i) unwanted conduct that has the
purpose or effect of violating a relevant person's dignity or
creating an intimidating, hostile, degrading, humiliating or
offensive environment for that person; or (ii) conduct that is
violent to a relevant person. This definition now aligns with the
definition of harassment set out in the Equality Act 2010, but
importantly the definition is not limited to conduct relating to a
protected characteristic. A relevant person is defined broadly to
capture employees and individuals working and providing services to
in scope firms.
- Scope: The existing restriction which limits
the application of COCON to conduct which relates to a non-banking
firm's SMCR financial activities remains. Broadly, SMCR
financial activities comprise a firm's regulated business
activities. As well as limiting the application to COCON to exclude
conduct in an individual's private life, this also means that
for firms which carry out unregulated as well as regulated business
services, COCON will only be relevant where an individual's
conduct relates to the regulated business services.
- Application: The rule will come into force on
1 September 2026. It will not have retrospective
effect and firms are not expected to do any retrospective analysis
regarding possible historic conduct breaches.
- Staff training: Firms will need to ensure
staff understand the new requirements. Firms are under a duty under
section 64B FSMA to notify conduct rules staff about the rules and
under CONC 2.3 to take all reasonable steps to ensure they
understand how the rules apply to them.
Proposed guidance: changes to FIT and COCON
- Proposed COCON guidance: The FCA has confirmed
that it is considering new additional guidance in COCON and is
consulting on a revised draft of the guidance previously consulted
on in CP23/30. The proposed guidance includes examples of scenarios
illustrating the boundary between work and private or personal
life; examples to help illustrate when conduct is outside of a
firm's SMCR financial activities; an example of how NFM may be
outside the scope of COCON because it only relates to the
non-financial services business of a firm; guidance on the
distinction between breaches of Individual Conduct Rules 1
(integrity) and 2 (due skill, care and diligence); and material
about the factors for determining whether NFM is serious.
- Proposed FIT guidance: The FCA position
remains clear that an individual's behaviour in their private
life can be relevant when assessing fitness and propriety; to that
end, the FCA has proposed guidance on such assessments. Specific
examples are provided regarding dishonesty and lack of integrity as
well as in respect of violence and sexual misconduct. Other points
to consider when assessing fitness and propriety in the context of
behaviour of an employee in their personal life is whether (i) the
behaviour is repeated or demonstrates a pattern, (ii) the behaviour
shows a willingness to disregard legal or ethical obligations or
(iii) it indicates an abuse of a position of trust. The FCA also
provides additional guidance regarding social media and an
individual's entitlement to express views even if controversial
or offensive without calling into question their fitness and
propriety. However, the guidance also states that firms could still
consider social media activity if it indicates a genuine risk of
the employee breaching regulatory requirements.
- Detection of NFM: The proposed guidance in FIT
makes it clear that the FCA does not expect firms to monitor their
employees' private lives to identify anything that is relevant
to fitness. However, where a firm may become aware of information
about an individual's private life that would – if
substantiated – call into question their fitness and
propriety under FIT, the firm should consider what steps it can
reasonably take to assess this possible impact. The FCA reminds
firms of their obligations under SUP 10C.14.18R (Notifications
about fitness, disciplinary action and breaches of COCON) that
not being able to establish the truth of an allegation of this kind
does not mean they should not report it if, were it established to
be true, it would reasonably be material to an assessment of
fitness and propriety.
- Threshold Conditions and regulatory
references: The FCA has decided not to make changes to the
Threshold Conditions or to introduce specific NFM guidance in
relation to regulatory references.
- Consultation period: Firms have until 10 September 2025 to respond on the proposals relating to the new guidance in FIT and COCON. The FCA has indicated that the proposed guidance if brought into effect should also apply from 1 September 2026, alongside the proposed rule changes in COCON.
Footnote
1. CP23/20: Diversity and inclusion in the financial sector – working together to drive change.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
