All authorised firms must notify the FCA, by the end of October, of certain disciplinary action taken against their staff.1 We seek to answer some of the questions firms may have about this requirement.
What is the reporting requirement?
Section 64C of FSMA 2000 requires firms to notify the regulator of any disciplinary action taken against staff in respect of conduct rules breaches. This is a new obligation for FCA "solo-regulated" firms, though it has applied to banks since 2017.
The FCA has emphasised that the obligation does not replace existing notification requirements. Firms should consider at all times whether any actual or suspected conduct rule breaches should be reported immediately under Principle 11 or SUP 15.3.11 R, which requires firms to notify the FCA of a "significant" breach of a conduct rule.
Which roles are covered by the requirement?
The reporting requirement extends to all individuals subject to the conduct rules, but for the 2020 report this means that only persons requiring certification (i.e. those in significant harm roles) and board directors who are not senior managers are covered. This is because:
- any disciplinary action against a senior manager should already have been reported within seven working days, under the rules in SUP 10C.14;
- other staff are not yet formally subject to the conduct rules (even if firms have applied them contractually) and so are not covered by the requirement. The FCA has announced that conduct rules will apply to relevant staff other than senior managers and certified persons from 31 March 2021, delayed from 9 December 2020 due to the coronavirus pandemic.
What must be reported?
The report must contain details of each disciplinary action taken by the firm during the reporting period where the reason for taking the disciplinary action is any "action, failure to act or circumstance" that amounts to a breach of the conduct rules. "Disciplinary action" for these purposes consists of any of the following:
- a formal written warning;
- dismissal; or
- the reduction or recovery of remuneration.
"Suspension" for these purposes means suspension as a disciplinary sanction imposed after an investigation, rather than where it is used as a precautionary measure during an investigation.
How should we prepare?
Firms should review all disciplinary action taken during the reporting period and determine in each case:
- whether the individual was covered by the reporting obligation at the time of the action;
- whether a reason for taking the disciplinary action was any action, failure to act or circumstance that amounted to a breach of the conduct rules; and
- if so, which conduct rule or rules were breached.
Firms may need to review the investigation reports or other records in order to determine the answers to these questions.
Does "non-financial misconduct" amount to a breach of the conduct rules?
For firms solely regulated by the FCA, the conduct rules only apply to conduct that relates either to the "SMCR financial activities" of the firm, or to (broadly speaking) activities of the firm that may have a negative prudential effect on the firm or the wider financial system. "SMCR financial activities" has a complicated definition but includes regulated activities and activities that are carried on in connection with, or held out as being for the purposes of, regulated activities.
Conduct that is unconnected with the firm's regulated activities would therefore appear not to be subject to the conduct rules. However, in a 2018 letter to the House of Commons' Women and Equalities Committee, Megan Butler of the FCA said that "sexual harassment and other forms of non-financial misconduct can amount to a breach of our Conduct Rules." This suggests that firms should give a broad scope to the conduct rules, and potentially include any misconduct that takes place in the work environment.
How much information must be provided?
As well as the prescribed identification information for each individual, the report must state which conduct rule or rules were breached, and must provide additional information about each breach. Although there is little guidance on what is required, we consider that a short paragraph summarising the misconduct by each individual will normally suffice.
What form must be used?
Submissions must be made on Form H, also known as "REP008", via the FCA's Gabriel system. The form must be submitted by the end of October 2020. A pdf version of the form is available for reference at SUP 15 Annex 7R.
Are nil returns required?
Yes, all firms must submit the form even if the firm did not impose any relevant disciplinary sanctions in the reporting period.
What is the reporting period?
The first reporting period for FCA solo-regulated firms is from the SMCR commencement date of 9 December 2019 to 31 August 2020. The reporting period for the 2021 report will be from 1 September 2020 to 31 August 2021, and subsequent periods will also run from September to August.
Why does the FCA want this data?
While the government imposed the reporting obligation in primary legislation, the FCA chose an annual reporting schedule, stating that it would be "disproportionate" to require more frequent reports. The FCA has emphasised that the onus is on firms to ensure that breaches of the conduct rules are dealt with effectively under their own disciplinary processes. The FCA will use the information from notifications to "help inform supervisory activity", which is likely to mean monitoring trends across the industry, and perhaps identifying those firms that report fewer breaches than might be expected for their size. Given the annual reporting schedule and likely volume of breaches, it will be unusual for the FCA to further investigate reported misconduct by specific individuals, though of course this cannot be ruled out.
Are there any updating requirements?
If a firm changes its mind about whether a breach has been committed, or decides that the individual breached a different rule than that notified, it should submit a revised notification in the next annual report after it becomes aware of the change