Understanding The New Non-Financial Misconduct Rule: What Should Legal, HR And Compliance Teams Be Thinking About Now?

This is the first article in our mini-series on understanding the new Non-Financial Misconduct (NFM) rule and guidance. NFM has been a focus for the Financial Conduct Authority (FCA) in recent years. In October 2025, it told a parliamentary committee that it was investigating 76 cases of bullying, harassment or discrimination in the financial sector. From 1 September 2026, an important change in the regulatory treatment of workplace misconduct will take effect across the UK financial services sector.

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 this article we look at what the new rule requires, why it matters and what legal, HR and compliance teams should be thinking about now.

Our subsequent articles will delve into some of the trickier issues that HR and compliance will have to grapple with when the rule comes into effect and how investigations will need to be adapted.

What is changing?

On 1 September 2026, COCON 1.1.7FR will come into force which extends the Conduct Rules in non-banking firms to expressly cover certain types of NFM. This brings non-banks more into line with the rules that apply to banks.

To summarise, there may be a breach of COCON 1.1.7FR if the conduct is:

• serious NFM;
• work related; and
• shows the individual has acted in breach of their regulatory responsibilities – the most likely being a breach of Conduct Rule 1 (acting with integrity) or Conduct Rule 2 (acting with due care, skill and diligence).

The FCA has long held the view that NFM can breach the Conduct Rules, be relevant to fitness and propriety, and inform its wider view of a firm’s culture. The new rule is designed to put that beyond doubt - bringing greater clarity and making enforcement more straightforward. As a result of the new rule, more NFM issues will be considered to be a breach of COCON rules.

The type of NFM to which this new rule applies is unwanted conduct which has the purpose or effect of violating dignity, creating an intimidating, hostile, degrading, humiliating or offensive environment or is conduct which is violent. Importantly, there will be no requirement for the misconduct to be connected with the financial services activity of the relevant firm.

Is there any guidance to support firms with their assessment of whether NFM amounts to a breach of COCON 1.1.7FR?

In short, yes. To help add some much-needed flesh to this new rule, the FCA has published its final guidance in Policy Statement PS25/23 ("Guidance") which will come into force on 1 September 2026. The Guidance gives examples of NFM – including bullying, sexual misconduct, harassment, discrimination.

The difficulty for firms will be in applying the Guidance – understanding, for example, whether the conduct in question is sufficiently serious. Another tricky area for firms will be identifying when conduct is work related. The FCA has given some examples – work events, work related travel and client functions – but there will be plenty of grey areas here – particularly around where the line will be drawn between work and private life – and firms are going to need to consider each scenario carefully. The FCA have also said that conduct in private life can be relevant to fitness and propriety. We delve into this in more detail in a future alert in this series on the new NFM rule. We also note that the Guidance makes it clear that a manager who allows NFM to occur may also be in breach of Conduct Rule 1 and/or Conduct Rule 2.

Will COCON 1.1.7FR be retrospective in its application?

No, it will have no retrospective application. This means that pre-1 September 2026 incidents should be dealt with under the requirements in place at the time, which as noted above could still amount to COCON breaches. There is no obligation to revisit past assessments.

Does the Guidance say anything about NFM under FIT?

It does, following calls for more clarity in this area, particularly around the extent to which firms need to look into NFM allegations concerning private life. The Guidance clarifies that NFM in private life is relevant if it shows that there is a material risk that the individual will breach regulatory standards and requirements. Trivial or implausible allegations or those that are irrelevant to fitness and propriety do not need to be investigated. However, conduct in private life that would be a breach of regulatory standards if repeated at work should be investigated e.g. violence or sexual misconduct or criminal activity.

Why does the new rule matter?

Culture is a regulatory issue:

The Guidance reinforce the FCA's view that behaviour and individual accountability are core regulatory concerns and should not be treated by firms as limited to disciplinary matters. Firms that treat NFM as solely an HR issue will find themselves exposed to sanctions by the FCA, such as fines. We expect to see a number of enforcement actions brought by the FCA in this space.

Investigations get more complex:

A single incident could trigger parallel assessments under disciplinary, regulatory and fitness assessments, each with their own thresholds and consequences. What constitutes NFM in COCON is similar to what amounts to discrimination under the Equality Act (although a crucial difference is that COCON requires no protected characteristic to be present). We will look at the challenges for HR and compliance on handling investigations in further detail in a future alert. Firms will also have to consider when they are required to inform the FCA of an investigation into NFM.

Collision with the Employment Rights Act 2025 ("ERA 2025"):

The ERA 2025 will extend tribunal limitation periods (not before October 2026) and enhance the duty to prevent sexual harassment (from 1 October 2026).This overlaps directly with the FCA's new framework and firms must comply with both simultaneously.

Career-ending stakes for individuals:

Findings of serious NFM feed into regulatory references and ongoing fitness and propriety assessments. Getting the assessment wrong could lead to claims for career-long loss. The removal of the cap on unfair dismissal compensatory awards from 1 January 2027 under the ERA 2025 will make this even more significant.

Judgement calls remain:

The FCA acknowledges it cannot provide examples for every situation and indeed it has been clear that the Guidance is there to support and not replace the firm's own judgement. Firms must retain ownership of difficult decisions. What is key is for firms to show they have exercised reasonable and proportionate judgement and can explain their actions to their own board, the regulator and/or a tribunal.

What should legal, HR and compliance teams be doing now?

With less than five months to go, here are our five key takeaway actions that HR and compliance should be considering now:

1. Gap analysis on policies and procedures

Review conduct, disciplinary, grievance and whistleblowing policies against the new COCON rule and Guidance. This includes employee handbooks, speak-up guidelines and decision-making materials. Update policies to reflect the seriousness framework and the COCON/FIT distinction.

2. Join up HR, compliance and legal

Establish clear triage protocols and escalation pathways so that all three functions are engaged from the outset when allegations arise. It will often not be immediately clear whether behaviour crosses the regulatory threshold.

3. Train the right people

Refresh training for all conduct rules staff, with tailored guidance for managers and senior leaders. Under section 64B of The Financial Services and Markets Act 2000, firms must inform conduct rules staff of the rules and ensure they understand how those rules apply. Senior managers "begin the culture cascade throughout the organisation". The FCA has clarified that managers will not be held responsible for failing to stop misconduct they could not reasonably have been expected to know about.

4. Update regulatory reference processes

Ensure processes capture findings of serious non-financial misconduct and that reporting thresholds are clearly understood.

5. Stress-test before September

Run realistic scenarios and "fire drills" to assess whether internal frameworks are fit for purpose under the new regime.

How is Gowling WLG helping clients deal with NFM?

At Gowling WLG, we recognise that the new NFM framework cuts across traditional internal silos. It is not simply an HR issue, nor purely a regulatory or litigation risk. It requires a coordinated, defensible approach that stands up to scrutiny from the FCA, tribunals and, increasingly, the court of public opinion. Our employment, regulatory and disputes lawyers work as a single, integrated team to support firms through this shift.

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.

Read the original article on GowlingWLG.com