The FCA’s new non-financial misconduct (NFM) rule, coming into force in September 2026, will significantly reshape how firms assess conduct under the FCA Conduct Rules (COCON) and Fit and Proper test (FIT).

In this series, we consider how inappropriate behaviours such as bullying and harassment are relevant to assessments of fitness and propriety under the Fit and Proper test for Employees and Senior Personnel (FIT) and the Code of Conduct sourcebook (COCON) in the FCA Handbook. In October 2025, the FCA told a parliamentary committee that it was investigating 76 cases of bullying, harassment or discrimination in the financial sector.

We have identified five tricky issues in our second article that legal, HR and compliance teams will have to grapple with when the new rule comes into effect. Our third and final article will consider how investigations will need to be adapted to deal with the new rule and what will need to be considered.

You can access our first article in this mini-series on what the new rule requires, why it matters and why legal, HR and compliance teams should be thinking about here.

1. Failing to identify when FCA non-financial misconduct is sufficiently serious

The question for firms assessing the seriousness of the NFM is: does it have the purpose or effect of violating a colleague's dignity or creating an intimidating, hostile, degrading, humiliating or offensive environment for them?  This aligns with the threshold for harassment in the Equality Act 2010 and it is therefore likely to align with firms' internal disciplinary policies on bullying and harassment.

The FCA has been clear that firms themselves are best placed to answer this question.  Whilst this shifts a considerable burden onto firms, the FCA has indicated that it expects to see evidence that firms have carried out a reasonable and proportionate assessment of the conduct in question. In other words, the regulator is not seeking to second guess the substance of a firm's judgement (or indeed determine that the judgement was correct), provided that judgement is reached through a rational and properly considered process.

Relevant factors to determine whether the conduct is sufficiently serious are likely to include, the duration of the NFM, whether it was isolated, how many people were impacted, if there were prior warnings and if the conduct was criminal.  Another central question to be considered is the power balance between the parties in question.

Practical Steps

Legal, HR and compliance teams should consider:

  • Developing structured seriousness assessment frameworks so that they are consistent and defensible, rather than left to ad hoc judgement.
  • Establishing triage protocols and joined up escalation pathways between HR, compliance and legal teams so that all three functions are engaged at the point an allegation arises.
  • This includes updating conduct breach reporting processes to ensure a broader range of conduct is being identified for the purposes of assessing regulatory and employment breaches, as well as fitness assessments.
  • Strengthening documentation and decision logs to demonstrate reasonable judgement and maintain a clear, contemporaneous record of the decisions taken. Firms may need to explain their actions to their board, the regulator or before a tribunal.

2. Misjudging the line between "work-related" and "private"

Determining when conduct is sufficiently "work-related" to fall within COCON is one of the more difficult aspects of the new framework. Helpfully, in the new guidance, the FCA has offered some clarity here.  It has produced a table of example scenarios where NFM may be considered work-related. Some of the examples given are unsurprising.

As you would expect, NFM at work organised events and where colleagues are travelling for work purposes e.g. to attend a client meeting, will be covered by COCON.  The guidance also attempts to clarify some more complex scenarios, albeit the FCA stresses the importance of firms using their own judgement in the relevant circumstances. It states that NFM which occurs at an event organised by someone at work in their personal capacity is unlikely to fall under COCON.

However, if that social event was organised by a manager and if that manager's direct report(s) felt obliged to attend and/or if the event took place after a firm event, the conduct may be sufficiently "work-related" to fall within the scope of COCON.  Context will be key here.

Even if the conduct in question falls outside the scope of COCON, it may well be relevant to FIT assessments where the test requires wider consideration, and so private life may matter.  Central to the determination is whether the individual's conduct in private life shows there is a material risk (not merely speculation or rumour) that the individual will breach their regulatory standards.  If the answer to that question is yes, it may well be appropriate to investigate private life.

Practical Steps

The second and third bullet points identified under section one above will be relevant here. In addition, legal, HR and compliance teams should also consider:

  • Developing clear internal guidance on where the work-related boundary lies in their firm's specific business context. For example, working through tailored, specific relevant examples such as work dinners, social events, conferences.

3. When is misconduct ‘work-related’ under COCON?

Identifying whether the NFM is sufficiently serious will be crucial not only to determining if there have been employment and regulatory breaches, but also to decisions on regulatory references, and fitness and propriety assessments.  The FCA has made clear that serious, substantiated NFM must be shared through regulatory references, just as financial misconduct currently is. The aim is to prevent "rolling bad apples": individuals moving from firm to firm without disclosure of past misconduct.

The practical challenges are considerable. Not every NFM incident will amount to a COCON breach. However, incidents falling short, such as private-life conduct or harassment breaching employment law alone, may still be relevant to fitness and propriety and thus to a regulatory reference.

Where an employee leaves before an investigation concludes, the FCA expects firms to actively consider whether to include details of the suspected misconduct in the reference, weighing materiality, reasonable grounds for belief and fairness. This creates an acute tension between the regulatory imperative to disclose and the employment law risks of including unsubstantiated allegations.

The landscape is further complicated by restrictions on NDAs. Amendments to the Employment Rights Act 2025 will prevent NDAs being used to stop staff speaking out about discrimination or harassment. The traditional "quiet exit" via a settlement agreement with robust confidentiality clauses will be significantly curtailed, and resolving issues through settlement will no longer eliminate regulatory risk.

Practical Steps

Legal, HR and compliance teams should consider:

  • Reviewing their regulatory reference processes to ensure they capture NFM related findings, and train staff responsible for completing references on the new obligations.
  • Reviewing annual recertification processes to ensure they respond to the revised rules.
  • Ensuring disclosure decisions are evidence based and proportionate, avoiding both defensive over-disclosure and under-disclosure.
  • Reviewing template settlement agreements in light of the forthcoming NDA restrictions and training legal and HR teams on the new limits on confidentiality provisions.

4. Ignoring the collision with the Employment Rights Act 2025

The NFM framework does not exist in a vacuum. It collides with sweeping changes under the Employment Rights Act 2025 (ERA), which should not be overlooked.

Two changes are particularly significant. First, from 1 January 2027, the qualifying period for unfair dismissal drops from two years to six months.  Second, the statutory cap on compensatory awards will be removed entirely. Together, these changes fundamentally alter the financial risk of poorly handled dismissals, particularly for higher earners.

Firms are likely to find employees dismissed following NFM processes far more willing to bring tribunal claims. Firms will need to be very careful in how they handle these and avoid knee-jerk responses.

As mentioned above, NFM findings can feed into regulatory references and fitness and propriety assessments, meaning a wrongful finding could lead to claims for career-long losses. The ERA will also extend tribunal limitation periods from three months to six months and enhance the duty to prevent sexual harassment from October 2026. Disclosures of sexual harassment are already a qualifying disclosure for whistleblowing purposes.

Practical Steps

Legal, HR and compliance teams should consider:

  • Mapping the interaction between the September 2026 COCON changes and the January 2027 employment law reforms as part of a single, coordinated compliance programme.
  • Reassessing settlement valuations and litigation strategy in light of the removal of the unfair dismissal cap.
  • Avoiding knee-jerk dismissals and looking instead at whether a lesser sanction, such as demotion or remuneration reduction, is more appropriate.

5. Underestimating the Burden on Senior Managers

The FCA guidance states that a manager who allows NFM to occur may themselves breach Conduct Rule 1 and Conduct Rule 2. Senior Manager Conduct Rules SC1 and SC2 are particularly relevant where serious NFM occurs within a senior manager's area of responsibility.

This could be perceived as being unduly onerous on senior managers, but they can take some comfort from the fact that they will not be held responsible for failing to stop misconduct they could not reasonably have been expected to know about or lacked the authority to act on. Reasonableness is critical and questions will be asked as to whether they had authority and the practical ability to do anything.

The very fact that this question will be asked means firms must ensure senior managers are equipped to recognise, escalate and respond to NFM issues, with their authority and responsibilities clearly documented.

The FCA has also indicated that senior managers "begin the culture cascade throughout the organisation". The regulator will look at tone from the top and not just in terms of policy endorsement but how managers actually behave and respond when problems arise. Firms where senior leaders tolerate poor behaviour will attract greater supervisory scrutiny, regardless of their written policies.

Practical Steps

Legal, HR and compliance teams should consider:

  • Refreshing training for all staff subject to the conduct rules, with tailored guidance for managers and senior leaders embedding it into management culture: it should not be a one-off exercise.
  • Helping senior managers understand that their accountability extends to creating an environment in which it is safe to report concerns.
  • Running realistic scenarios and "fire drills" to stress-test internal frameworks, so that when a real allegation arises the response is practised, reasonable, proportionate and documented.

How can we help?

With less than four months until 1 September 2026, the time for preparation is now. The new NFM framework represents a fundamental shift from informal management of workplace behaviour to documented accountability, regulatory reporting and personal consequences. The firms that will fare best are those that have genuinely embedded the right standards into how their managers think and act when things go wrong.

At Gowling WLG, we help clients translate the new rules into practical, workable frameworks. This includes conducting gap analyses across policies, procedures and governance structures, ensuring alignment between disciplinary processes, Conduct Rules assessments and fitness and propriety evaluations. We focus not just on technical compliance, but on helping firms evidence reasonable and proportionate decision-making – something the FCA has made clear will be critical.

When allegations of NFM arise, our joined-up approach comes into its own. We support clients with triaging issues at the outset, determining whether and when regulatory thresholds may be engaged, and structuring investigations that can withstand challenge from multiple angles.

Our employment and regulatory specialists work together to navigate the overlap between COCON, FIT and employment law obligations, while our disputes team anticipate how decisions may be tested in tribunal proceedings, litigation or enforcement action.

Beyond reactive support, we help firms get ahead of the risk. This includes designing and delivering tailored training for HR, compliance teams and senior managers; stress-testing frameworks through scenario planning; and refining regulatory reference processes to ensure consistency and accuracy.

For tailored advice on navigating the FCA’s evolving expectations around non-financial misconduct, contact Jonathan Chamberlain, Guy Stevenson, Emma Bufton or a member of the team.