Employment law and financial regulation
May 2013 | EXPERT BRIEFING | EMPLOYMENT LAW
Where an employee is suspected of misconduct that may breach regulatory rules, this may have consequences in terms of both the employee’s employment and the employer’s regulatory duties. To deal with the matter effectively, the employer will need to consider a number of potentially competing interests, including the need to maintain good relations with the regulator and protect itself against possible enforcement action on one hand, and the employee’s employment rights on the other.
Changes to UK financial regulation
On 1 April 2013 the Financial Services Authority (FSA) was replaced by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). The PRA’s role is to ensure the stability of financial services firms, whilst the FCA has taken over as the financial services industry’s watchdog. Both the PRA and the FCA have disciplinary and enforcement powers, however, this article focuses on FCA investigations.
The FCA has assumed responsibility for the market abuse regime from the FSA and therefore has the power to investigate (amongst other things) suspected insider dealing, improper disclosure and manipulation of transactions.
An FCA investigation can be prompted by receipt of a suspicious transaction report from a regulated firm, FCA monitoring or receipt of information from another source. An investigation will often be prompted by the firm where the alleged misconduct took place, as regulated firms are obliged to notify the FCA of matters including a significant breach of a rule or principle and instances of suspected fraud, irregularities or serious misconduct concerning honesty or integrity.
Following initial evidence gathering, the FCA will decide whether to investigate further. If it decides to do so, it may prepare a notice of appointment of investigators and contact the relevant firm or individual for initial discussions about the scope of the investigation. This may be the first time a firm or individual hears of the proposed investigation.
Once it has reviewed all the relevant documentation, the FCA will conduct detailed interviews with the individuals concerned. When its investigation is complete it will decide what (if any) further action to take, including possible civil or criminal sanctions.
An employer may undertake an internal investigation into suspected misconduct by an employee in parallel with (or before) an FCA investigation. An internal investigation is likely to have several purposes including gathering information to feed back to the FCA and to be used in potential disciplinary proceedings against the employee. From an employment law perspective, an internal investigation must follow fair principles. It should take no longer than reasonably necessary and be conducted confidentially. Where an employee is suspected of misconduct involving alleged dishonesty, there will be a higher threshold for what constitutes a reasonable investigation.
Suspension is the first action that an employer is likely to consider where an employee is suspected of serious misconduct. An employer should have regard to any provisions in the employee’s employment contract, together with any relevant policies relating to suspension. Suspension should not be used as a disciplinary sanction and should last only as long as reasonably necessary.
There is a danger that suspending an employee could alert them to the fact they are (or are about to become) subject to an investigation. Forewarning the employee could hamper the investigation by giving them the opportunity to interfere with evidence.
Suspending an employee for the duration of an investigation, which could take months (or, exceptionally, years), may be unreasonable. The employer should consider whether the employee’s assistance would be required during the investigation, as a suspended employee is less likely to assist willingly, particularly if he or she considers their suspension to be unfair or discriminatory in any way. Moreover, suspending an employee is likely to affect their willingness to return to work. Generally, the longer an employee is suspended, the more difficult it is for them to return, as suspended employees quickly feel alienated and often consider their reputations to have been damaged beyond repair.
As an alternative to suspension, an employer could transfer an employee away from the area or function relating to their suspected wrongdoing. However, unless the employee’s employment contract makes provision for this, transferring them without their consent may constitute a breach of contract.
Where the employee suspended or otherwise transferred from their normal duties is an ‘approved person’ under the FCA regime, it may be necessary for the employer to file a ‘Form C’ with the FCA (notifying it that the individual is ceasing to perform their controlled function). If so, the employer must notify the FCA as soon as practicable, with the completed Form C following within seven working days. An employer should consider carefully the details they include in Form C, as these could affect the employee’s future prospects of attaining FCA approved status.
Following its internal investigation an employer may consider it necessary to take disciplinary action against the employee. At this stage there is significant potential for tension between the employer’s position with the FCA and its position with the employee or employees in question. If the circumstances warrant it, the FCA will expect the employer to take robust action and the employer may feel some pressure to dismiss the employee to demonstrate to the FCA that it takes misconduct seriously.
The importance placed on the employer’s relationship with the FCA will not, however, excuse it from the requirement to comply with its employment law obligations.
The fairness of any dismissal will depend, in part, on whether the employer acted reasonably in the overall circumstances of the case. Ideally, the employee should be given the opportunity to explain his or her actions. The employer should avoid jumping to conclusions and prevent its compliance and/or legal departments (who may be responsible for protecting the employer’s position with the FCA) from interfering with the independence of the disciplinary process.
An employer should also ensure that it follows its disciplinary processes, which should comply with the Advisory, Conciliation and Arbitration Service’s Code of Practice on Disciplinary and Grievance Procedures (‘the ACAS Code’). Failure to follow disciplinary processes aligned with the ACAS Code may render a dismissal unfair and lead to an increase in any compensation awarded to the employee.
Where an employee is accused of a criminal offence, the employer may be advised in some cases to suspend reaching a decision in order not to prejudice the pending or ongoing FCA investigation. Alternatively, in some instances, it may be practicable, whilst reserving judgment on matters that the FCA is investigating, to address through the disciplinary process issues that do not impinge on the FCA investigation.
Negotiated severance, exits and references
Depending on the precise case in question, it can be common for employers and employees in these circumstances to hold discussions with the intention of reaching an agreed exit. Such discussions are conducted on a ‘without prejudice’ basis so that they are privileged and cannot be referred to in future legal proceedings, except in exceptional circumstances. There can be several advantages for both employer and employee in reaching a negotiated severance under a compromise agreement. For example, from the employer’s perspective, having the employee sign a compromise agreement will prevent them from pursuing statutory claims (such as unfair dismissal or discrimination claims) against it, whereas, from the employee’s perspective, it may avoid a potentially damaging disciplinary finding by the employer.
However, when negotiating a severance package, an employer has to operate under certain constraints. For instance, it remains obliged to deal with the FCA in an open and cooperative manner and to supply information to the FCA and other regulated firms. These obligations apply regardless of any agreement entered into as part of a negotiated severance.
Employees will often seek to agree a reference to future employers as part of a negotiated severance. An employer should take care in agreeing such references as, under the FCA Handbook, they are under an obligation, when requested, to give another firm which is considering appointing the employee all relevant information of which it is aware. In these circumstances, an employer can face a difficult balancing act as it owes a duty to both its former employee and the recipient firm to exercise due care and skill. In practice, many regulated firms’ standard references will be very basic (confirming last position held and dates of service).
Employers should also note that the FCA’s Remuneration Code expressly applies to severance packages. Under the Remuneration Code employers must ensure that payments related to the early termination of a contract reflect performance achieved and are not designed in a way that rewards failure. Therefore, excessive severance payments may breach the Remuneration Code.
Dealing with suspected employee misconduct can be challenging for an employer at the best of times, but particularly in an environment subject to financial regulation.
In these circumstances, it is critical that the employer involves the right personnel at the outset (including, as necessary, legal, compliance and human resources functions) and anticipates the various competing interests at play.
Tim Spillane is a partner and Head of the Employment Law Department, and Peter Nicholson and Tom Brown are lawyers, at Stewarts Law LLP. Mr Spillane can be contacted on +44 (0)20 7822 8000 or by email: email@example.com. Mr Nicholson can be contacted by email: firstname.lastname@example.org. Mr Brown can be contacted by email: email@example.com.
© Financier Worldwide
Tim Spillane, Peter Nicholson and Tom Brown
Stewarts Law LLP