Criminal offenses – even serious offences – will not necessarily preclude someone from being approved under the Senior Managers and Certification Regime (SMCR) of the UK Financial Conduct Authority (FCA). Rather, what may determine fitness and propriety is the transparency and honesty of that person towards the FCA, particularly when reporting a criminal offense or other misconduct.
That was the recent decision of the UK Upper Tribunal (Tax and Chancery Chamber) (the Tribunal), which underlines that it is critically important for any person making a disclosure about misconduct to the FCA to have experienced legal advice and representation before doing so.
In March 2017, a FCA-regulated individual (“the individual”) was convicted of a serious sexual offense. The individual, an independent financial adviser, was an approved person regulated by the FCA (the predecessor regime to the SMCR). He did not inform the FCA of the situation, and the FCA became aware only after a complaint by a member of public.
On October 1, 2020, the FCA published a Decision Notice, under which it withdrew the individual’s approvals and made a prohibition order against him. The FCA made this decision on the basis that he was no longer a fit and proper person as he lacked the necessary integrity and reputation, posing a risk to consumers and to confidence in the financial system. The individual referred the decision to the Tribunal, which supervises the FCA’s regulatory decisions.
The Tribunal’s decision
On August 31, 2021, the Tribunal ruled that a decision to remove the individual’s approval to perform senior management functions and impose a prohibition order was reasonably open to the FCA based on
(i) the individual’s breach of his bail conditions
(i) his failure to be open and cooperative with the FCA, including failing to inform the FCA of his arrests and the fact that the Charted Insurance Institute did not renew his Statement of Professional Standing
The Tribunal held that the circumstances surrounding the offense showed that there is a serious risk that the individual would continue to put his own interests above those of complying with his duty of candor and his obligation to be open and transparent with the regulator.
Importantly, the Tribunal also held that had it been asked to decide the case on the basis of the criminal conviction alone, then it is likely that the Tribunal “would have asked the Authority to reconsider its decision.”
Common criminal offenses or internal disciplinary decisions are unlikely to come to the FCA’s attention unless the offender or their employer makes a regulatory disclosure. Previously, the FCA took a stronger line in respect of nondisclosure than it did regarding the underlying misconduct unless it was directly related to the individual’s performance of their regulated functions or involved dishonesty. This is the first case in which the Tribunal has had to consider whether the FCA is entitled to impose a prohibition order based on an individual’s conviction for a criminal offense that does not involve dishonesty and is unrelated to the regulated activity of the individual.
As public attitudes to the relationship between private misconduct and the workplace have undergone considerable change, the FCA in its public statements and policies has reflected public disapprobation of sexual harassment, bullying, racial abuse, and other discreditable conduct. The FCA is not alone as a regulator seeking to navigate the interaction between public outrage, in response to misconduct occurring in an individual’s personal life, and the existing regulatory framework.
In that regard, it is interesting to note that the Tribunal applied the principles derived from solicitors’ conduct cases, most notably the recent decision in Beckwith. Thus, regulatory action for misconduct can be engaged only where failure to act without integrity in one’s personal life is of qualitative relevance to how the individual is required to conduct himself in his or her professional life.
The Tribunal explained that the FCA cannot simply assess whether the behavior concerned demonstrates a lack of integrity at large; rather, it must assess whether the behavior engages the specific regulatory standards. As such, the mere fact of a conviction, even for a serious sexual offense, does not itself mean a person is not fit and proper. While that may give some comfort to regulated individuals who are convicted of a crime not involving dishonesty, it would not be advisable to assume that is the end of matters.
The FCA Handbook requires that both firms and their employees are transparent with the FCA and proactive in informing it of issues: The starting point for any regulated individual involved in any impropriety will be their obligation to make a transparent disclosure or bear the consequences if they are discovered.
The obligation to make the disclosure will often be clear, but the inevitable follow-up question from the FCA — “… and why does the firm consider that the individual is still fit and proper?” — is more complicated. That requires a detailed understanding of the case decision and the principles in Beckwith and often a sound understanding of criminal practice and procedure too. Sidley’s experience of dealing with the FCA and other regulators, as well as our experience in defending criminal proceedings, means we are ideally placed to assist regulated persons and firms considering making disclosures.
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.
Attorney Advertising—Sidley Austin LLP, One South Dearborn, Chicago, IL 60603. +1 312 853 7000. Sidley and Sidley Austin refer to Sidley Austin LLP and affiliated partnerships, as explained at www.sidley.com/disclaimer.
© Sidley Austin LLP