U.K. managers told to keep eye on employees’ out-of-office lives

Money managers operating in the U.K. are not only having to enhance the scrutiny and assessment of their employees based on behavior inside and outside the office as the result of a new conduct regulation, they're also having to set their own criteria against which to judge staff.

The enhanced regulation is supposed to bring more accountability to those running client money by weeding out bad behavior and ensuring that the U.K. Financial Conduct Authority is kept up to date with the professional and personal conduct of money management executives. But the non-specific nature of what constitutes bad behavior — which is open to interpretation by individual money management firms rather than being defined by the regulator — could lead to a "witch hunt," with employees potentially fired for "crazy reasons," one source at a law firm warned, asking not to be identified.

In a revamp of corporate conduct rules under the Senior Managers and Certification Regime — implemented fully in March to cover all FCA-regulated firms after a delay because of the COVID-19 pandemic — U.K. money managers now have to monitor executives who have significant influence over the management of client money more closely.

The regulation, which extends requirements that have applied to bankers for years, stem from the global financial crisis, which led U.K. watchdogs to demand that firms better scrutinize their employees in order to start rebuilding trust in the financial services industry.

Since 2019, firms have had to name a senior manager or managers — someone who performs senior management functions as determined by the FCA and who may also be held personally responsible for any breach of regulatory rules at the firm. By March 31, senior managers of money management firms have had to identify and certify — on an annual basis — staff such as portfolio managers, analysts and other employees considered by firms to be risk takers, as being "fit and proper" to invest client money.

The enhanced rules put more pressure on individuals to disclose any potential issues with their conduct. But they also mean that, while money managers have always been expected to make sure their staff are behaving properly in the workplace — particularly when it comes to running assets — they're now also having to vouch for an employee's conduct outside of work, going so far as deciding whether minor offenses such as receiving a speeding ticket warrants decertification. That decision is deferred to the firm's internal compliance team and then could be escalated to an internal panel, which decides whether the FCA needs to know about any potential red flags in the company.

"From an employee's perspective, it is a matter of disclosing" any professional or personal problems that their employer should know, said Lydia Buttinger, London-based head of shared services at Standard Life Aberdeen PLC, the parent company of Aberdeen Standard Investments Ltd. It's then up to a firm to decide if the behavior is a big enough concern to affect the fitness and propriety of the person in performing the role, she said.

The regulation, she said, is clear and requires firms "to exercise their judgment rather than being prescriptive or list-based. This is to be expected for this type of regulation as you can't list every scenario that might happen, so firms need to understand the spirit and intent of the regulation and apply their judgment."

Most small traffic offenses, for example, would not be considered relevant and would not appear on criminal record checks, "but non-disclosure of a county court judgment or an incident where someone lied as part of a traffic offense, that could be considered a concern." She added that a manager would need to take all relevant factors into consideration before making a decision to certify a new employee or decertify an employee who misbehaved. If the firm decides to decertify the employee, that information is then reported to the FCA.

Ms. Buttinger's firm, which certified 600 employees as of March 31, also has introduced its upgraded U.K. conduct rules into its global policy.

Aberdeen Standard also implemented criminal record checks every three years for lower-level staff and every year for senior managers, as well as credit-score checks to better assess certified employees' "financial soundness" in efforts to prevent the mismanagement of money because of the new rules.

Other managers are increasingly screening employees for criminal convictions, completing credit checks and offering enhanced training to help in the understanding of the rules and, ultimately, to detect any breaches.

In response to the regulation, Geneva-based Unigestion recently introduced behavior assessments into its annual appraisal process alongside the existing assessment of results and expertise, CEO Fiona Frick said.

And San Francisco-based Wells Fargo Asset Management introduced annual self-disclosure by employees to senior managers in the U.K. ahead of the March 31 deadline. "In addition to independent checks we conduct (when we) hire and every three years thereafter, we ask people to attest that they are not in any civil or criminal proceedings," Deirdre Flood, head of international distribution at Wells Fargo Asset Management in London, said in a telephone interview. Ms. Flood is the firm's named senior manager to the FCA.

"The onus is on firms to certify that employees are fit and proper," she said, adding that the firm has certified all of its senior and junior portfolio managers, all of its investment analysts and staff in client-facing roles.

Ms. Flood called her firm's approach "pretty rigorous" in that any department head with a team is responsible for testifying internally that their teams are fit and proper. "I think the regime will shine the light on the accountability and will minimize bad behavior," she said.

Wells Fargo employees are receiving competence and conduct-related training to help with the rules' implementation and understanding. As part of that, the firm is checking employees' conduct in hypothetical situations, such as testing to see what an employee would do if, for example, a travel snag resulted in them being stranded in a country where they were not legally allowed to work. The training is to counter mistakes in "situations where employees are inadvertently complicit," Ms. Flood said.

Firms have also had to upgrade their processes for detecting conduct breaches, which the regime makes "more intensive," said Linda Gibson, London-based director and head of regulatory change at financial services firm Pershing LLC.

Since any breach of conduct rules detected must be escalated to the compliance team, "it's really key to have a good tool" for monitoring that chain of responsibility, she said.

"Something could come back three years down the line. It is crucial that the firm can evidence what questions it asked and what answers were provided" in the case of a potential breach, she said. "Firms need to be able to have a way to track cases of conduct breaches for their own internal investigation or when the regulator comes knocking to pull facts together."

To be fair to the employee, the breach-escalation process needs to be independent and shouldn't involve a line manager, she added.

The trouble is, the FCA's description of what needs to be considered an issue affecting professional and personal conduct is non-specific.

"Nobody knows what the perfect (way of implementing the rules) is, because people are inventing it as we go along," the legal source said.

That means there can be doubt over what constitutes a breach of the code of conduct and what needs to be reported to the FCA, said Adrian Crawford, partner at law firm Kingsley Napley LLP in London.

It also means that firms may end up straying into employees' social and personal lives in ways they have not done before, said Tim Harris, senior associate at law firm Cohen & Gresser LLP in London.

In some cases, employees may find that an issue they thought to be too minor to report to their manager for consideration of whether it constitutes a breach of conduct — such as a police caution but no charge — might land them in hot water under the new rules. Firms could conclude that failure to inform a manager showed lack of integrity and breached compliance rules, even leading to termination of the employee, Mr. Crawford said.

Whatever firms deem to be a breach of conduct, the record of such breaches will follow the employee to new roles, too. Employers' records on employee conduct should be disclosed to other prospective employers, and employers must request a reference from the previous employer that notes breaches of the conduct rules that have led to disciplinary action and any adverse fit and proper decisions.

The new regulation also prevents firms from entering non-disclosure agreements regarding an employee's conduct, an FCA spokeswoman confirmed.