The City Has Weeks to Prepare for Rules It Cannot Hide Behaviour From

The City's largest hedge funds, insurers and pension funds are racing to prepare for sweeping rules that will stop nearly 40,000 companies from concealing bullying and harassment cases from the financial watchdog.

From the start of next month, the Financial Conduct Authority extends a crackdown on misconduct that so far has applied mainly to banking, taking in a much wider group of investment firms and brokers.

What the rules require

Firms will be expected to report serious cases of non-financial misconduct to the regulator. They will also be required to pass reports of bad behaviour — including racism, sexual harassment, violence and intimidation — to a manager's prospective future employer.

That second provision is the one with teeth. It is aimed at what the industry calls rolling bad apples: managers who move to a new firm as an internal investigation concludes, arriving with a clean record because nothing was ever recorded anywhere the next employer could see.

The rules apply to any company bound by the FCA's senior managers and certification regime, which holds senior figures personally accountable for wrongdoing.

From next month companies must report serious misconduct — including racism, sexual harassment and violence — to any possible future employer. Photograph: Jason Alden/Bloomberg/Getty

The scramble

With the deadline close, hedge funds, investment managers, insurers and brokers are training staff and, notably, closing out internal investigations.

"The countdown is now on for regulated firms to be ready for the new rules taking effect in September," said Jill Lorimer, a partner at the law firm Kingsley Napley who specialises in financial regulation. "We are aware of firms brushing up their policies and procedures in this area and ensuring training has been thoroughly refreshed and completed."

She added a more pointed observation: "Firms dealing with allegations against their people now may want to ensure that these processes are wrapped up before the new regime takes effect. The FCA will no doubt be looking for cases in this area to show it is willing to flex its muscles."

That is a lawyer describing, in professional language, a rush to conclude investigations under the old rules rather than the new ones. It is legal, and it is a predictable feature of any regime with a start date.

"The City should take these changes very seriously indeed, as no firm will want to be the target of high-profile regulatory attention," Lorimer said.

The argument against, and why it lost

The rules arrive despite pushback from City firms and some politicians, who complain that red tape in finance is holding back investment, jobs and growth.

A run of misconduct cases has strengthened the opposing argument: that cleaning up the sector could be a competitive advantage, particularly for an industry long criticised for a boys'-club culture. Firms that struggle to recruit and retain skilled staff — and the City does — cannot indefinitely treat workplace conduct as a matter separate from commercial performance.

The shift underneath

The deeper change is conceptual. The FCA has historically policed conduct towards markets and customers, leaving how a firm treats its own employees to employment law.

These rules treat internal behaviour as evidence about fitness to hold a regulated role. A manager who intimidates colleagues is, on this reading, demonstrating something relevant about their judgement — and that is a considerably broader definition of a regulator's business than the industry has been used to.