It has been a summer of revelations leaving the financial services sector facing uncertainty and increased scrutiny on how allegations of behavioral misconduct might be managed going forward. This came after multiple allegations of historic sexual assault and harassment were reported against hedge fund founder, Crispin Odey (Odey) of Odey Asset Management (OAM).[1]
Since the cascade of public allegations against Odey, OAM has been reported to have lost several significant banking relationships[2] and has allegedly been forced to implement a “wind-down” plan in the wake of the damaging media reports against the firm and its associated entities.[3] The firm and Odey are also both under investigation by the Financial Conduct Authority (FCA).[4]
The investigation against Odey and OAM comes at a turbulent time for the sector. There have been frequent reports in the media on the outcome of various legal proceedings involving financial entities associated with the late sex offender and financier, Jeffrey Epstein.[5] The UK Treasury Committee also recently launched a new inquiry into sexual harassment and sexism in city businesses, specifically within financial services.[6]
So, what does this mean for firms dealing with allegations of behavioral misconduct and abuse issues?
This article discusses how these events may serve as a catalyst for change in how the FCA approaches the investigation of alleged sensitive workplace issues and the potential impact this may have on the wider sector. This article does not make any presumptions of guilt regarding any ongoing investigations into any of the individuals or entities named herein.
The FCA’s Remit to Investigate Non-Financial Misconduct
The nature of the FCA’s investigation had not been public until recently when allegations against Odey hit the headlines in the summer. In its letter to the Treasury Committee on July 3, 2023[7] the FCA confirmed its investigation into Odey and OAM started in “mid-2021” with the focus of its investigation being whether Odey is a “fit and proper” person to work in financial services. The FCA also confirmed that its investigation would address Odey’s conduct into allegations he “dismissed OAM’s Executive Committee for an improper purpose.” This was in response to questions raised by the Treasury Committee in its letter to the FCA back in June,[8] concerning allegations that Odey had dismissed and replaced the OAM committee seeking to censure him in 2021, which resulted in no action being taken against him at the time.
Section 2.1 of the FCA’s “Fit and Proper Test for Employees and Senior Personnel sourcebook (FIT)”[9] refers to “honest, integrity and reputation” as attributes to determine whether an individual in a senior manager or certified regime role within the firm is deemed to be “fit and proper.” The guidance currently does not include defined behaviors constituting any form of behavioral misconduct, such as sexual harassment or assault. However, the FCA has, in the recent past, successfully banned various senior managers following investigations that concluded behavioral misconduct had occurred such as sexual assault, indecent images, sexual harassment, and voyeurism.[10]
With the government’s letter and recent inquiry[11] immediately following the reported allegations, it appears the FCA is currently facing intense pressure to make a stand against the type of behavior Odey is accused of. The challenge for the FCA is its regulatory perimeter. What behavior can the FCA take into consideration when determining whether someone is fit and proper?
In the case of Jon Frensham, a senior manager banned in relation to the failure to disclose a conviction concerning child sexual grooming offenses [12], the Upper Tribunal said that the FCA had “failed to bridge the gap” between the historic sexual offense and Mr. Frensham’s role as a financial advisor. Will the FCA seek to bridge the gap in relation to any proceedings against Odey if allegations are found to be substantiated?
The outcome of the FCA’s investigation into Odey could be significant in reshaping the current FIT guidance to explicitly define poor behaviors that should be investigated if the allegations are found. Alternatively, if the FCA is unable to investigate and sanction an individual for this type of conduct, its powers may be expanded so that it can.
Regulatory Focus of Firms’ Governance of Non-Financial Misconduct
The FCA confirmed in July that it was also investigating whether OAM failed to implement adequate governance procedures in relation to the reports against Odey’s alleged behavior.[13]
Reports against Odey, according to media sources, date as far back as 1985 with some reporters claiming to have issued formal complaints to the business without any response or investigation by OAM until 2021.[14] When allegations relating to behavioral issues are not responded to as part of a business’s investigative procedures, this can impact the workplace culture, and may be construed that the firm does not take allegations of this nature seriously enough.
The Odey case also highlights the potential risk for firms when investigations are conducted involving senior individuals who may abuse their positions in relation to any form of remediation the firm decides to take. If this abuse of power can be brought to bear in the context of behavioral misconduct, then what is to stop an individual from abusing such power in relation to financial misconduct? Manipulative behavior and abuse of systems, people, and positions have been observed in both financial and non-financial misconduct cases and investigations, even though the motives are very different.
With workplace conduct and abuse topics dominating headlines, together with the regulatory pressure from the government,[15] it is expected that the Odey case, no matter the outcome, may drive further regulatory change to assess whether firms have sufficiently prevented and responded to allegations of non-financial misconduct.
The Reputational Aspect
For all sectors, including the financial sector, the reputational risk is evident. Aside from the regulatory context, the Odey case demonstrates how rapidly and dramatically a firm’s reputation can be impacted when allegations of behavioral issues are made public.
Reports that are ignored or inadequately investigated increase the risk of allegations being made public. Risk factors heightening the reputational impact, when this happens, include the seriousness of the alleged behavior (i.e., sexual in nature), the length of time the alleged behavior has occurred, and the seniority of individuals involved. The nature of the behaviors relating to sensitive workplace issues tends to invoke a higher emotional response compared to other types of misconduct. This also increases the likelihood of reports being made public if not properly responded to or managed by the business. It is clear from the public reaction to this case and similar matters reported across other sectors that firms can no longer wait or suppress these types of workplace issues when they are reported.
By mitigating this risk, firms can reduce the potential impact on operations and brand. This includes timely and formal responses to reports of behavioral misconduct, with designated functions or officers responsible for triaging reports (e.g., HR, investigation, or compliance functions). A formal response process can help to promote a safe and open reporting culture further demonstrating a duty of care. An effective triage process also helps resource allocation and allows early resolution of less serious and/or unsubstantiated allegations.
Ensuring sensitive allegations are investigated thoroughly and approached in the right way will also help firms in managing reputation risk. Where the matter involves senior management and highly sensitive and serious offenses, independent investigation is recommended to ensure objectivity. This is particularly important where there are reports of alleged systemic misbehavior affecting company culture.
[2] FT - 8 June 2023 (ft.com) FT - 2 July 2023 (ft.com)
[3] FT - 24 August 2023 (ft.com)
[4] UK Parliament - FCA letter dated 3 July 2023
[5] FT 25 July 2023 FT - 28 July 2023 (ft.com) FT - 21 July 2023 (ft.com)
[6] UK Parliament - 14 July 2023
[7] UK Parliament - FCA letter dated 3 July 2023
[8] UK Parliament - Treasury Committee letter dated 14 June 2023
[9] Fit and Proper Test for Employees and Senior Personnel Sourcebook (fca.org.uk)
[10] UK Parliament - FCA letter dated 3 July 2023/Annex A
[11] UK Parliament - Treasury Committee
[12] Jon Frensham v FCA [2021] UKUT 0222 (TCC)
[13] UK Parliament - FCA letter dated 3 July 2023
[14] FT - 8 June 2023 (ft.com)
[15] UK Parliament - 14 June 2023
© Copyright 2023. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
