Why the rise in investigations – a regulatory perspective
Workplace culture is increasingly an area of regulatory scrutiny. Regulators are recognising that if organisations do not prioritise having an open and inclusive culture where speaking up is encouraged, decision-making and risk management are likely to be impaired. Organisations are, therefore, coming under heightened scrutiny from regulators, investors, and the media when they fail to deal adequately with workplace issues such as bullying, harassment, and whistleblowing / speak up complaints. These failures may result in litigation, negative publicity, staff backlash and changes in the boardroom.
The Financial Conduct Authority’s (FCA) proposals in September last year to introduce a new regulatory framework on Diversity & Inclusion bring workplace culture in the financial services sector into sharp focus. Under these proposals the FCA has said it intends to incorporate the concept of “non-financial misconduct” into: its Conduct Rules in COCON in the FCA Handbook; fit and proper assessments (under the Senior Managers and Certification Regime); the guidance on suitability under the FCA’s Threshold Conditions; and the giving of regulatory references. The FCA’s focus on workplace culture is also evident in its February 2024 survey issued to certain regulated firms in the insurance sector. This comprehensive survey seeks a range of data from firms regarding incidents of non-financial misconduct, including the number of incidents and also the method by which such incidents are detected, and the outcome of such incidents (e.g. dismissal, warnings, decision not upheld). In this context, it is clear that concerns need to be properly investigated by firms so as to have confidence in the outcome reached. In the likely event that the FCA’s proposals on non-financial misconduct come into force, this will be an expansion of its remit over regulated firms and likely build on the existing trend towards comprehensive workplace investigations when serious issues are raised.
The increased regulatory interest is not limited to the financial services sector. Other regulators are also focussing on workplace culture. The Solicitors Regulation Authority’s (SRA) own investigations into the conduct of lawyers and the culture of law firms have attracted recent mainstream media attention. The SRA’s guidance on workplace environment, which was updated in May last year, describes circumstances where the SRA itself will take action in relation to workplace conduct issues. This includes “where the work environment does not support the delivery of appropriate outcomes and services to clients. Or creates a culture in which unethical behaviour can flourish or where staff are persistently unable to raise concerns or have issues addressed.”
There has also been much press coverage of workplace issues at accountancy firms, and policy initiatives and developments in the accountancy sphere suggest that regulatory bodies are taking non-financial misconduct issues seriously.
What other factors are at play?
It is clear that movements like “#MeToo” and “Black Lives Matter” have encouraged a cultural shift towards speaking out about behaviours in the workplace, and a recognition that poor conduct cannot be swept under the carpet; they need to be looked into properly and addressed.
Additionally, employers are increasingly recognising the critical importance of a positive workplace culture to their organisations. A negative culture can lead to a multitude of problems, including people leaving, or taking sickness absence due to bullying or harassment.
Investors are also paying more attention to these issues. They recognise that a scandal within the company which has not been dealt with can have damaging effects reputationally and impact the value of a company. Many investors are focusing on ESG and want to invest in responsible organisations that care about social and governance issues.
This combination of pressures means that companies are concerned more than ever about cultural issues.
We often advise clients as to how to conduct workplace investigations internally. But given the increasing scrutiny and expectations being placed on organisations, it is very common for us to advise on how (or whether) more serious workplace issues can (or should) be investigated externally, and for us to conduct investigations on behalf of clients. Where there is existing or potential regulatory interest in the matters under investigation, we can also advise clients on their exposure to potential enforcement action, for example arising from a failure to implement adequate governance and controls to manage risks relating to misconduct and poor culture.
When should organisations investigate?
An investigation may be necessary whenever there is any allegation of wrongdoing in the workplace. Often the allegation is raised by an employee as part of a grievance or a whistleblowing complaint, which triggers an investigation under the organisation’s grievance or whistleblowing policy. However, an investigation may be necessary even where no formal complaint has been made but a concern has been raised that an individual has done something wrong, or the company may have broken the law. Investigations cover a multitude of issues ranging from (for example) fraud, negligence or financial irregularities (including bribery and corruption), to breach of health and safety or environmental standards, to cultural issues such as bullying, harassment or discrimination.
Internal or external investigation?
It is becoming increasingly common for organisations to bring in an external investigator rather than conducting the investigation in-house. This is primarily because having someone independent, or at least external to the organisation, adds credibility to the investigation, which increases confidence in the investigation both internally (so employees have more confidence in the outcome) and externally (if a regulator or investor wants to scrutinise the investigation).
Should the investigation be conducted by lawyers?
An advantage of having a lawyer conduct the investigation is the potential (although this is by no means guaranteed) for privilege to be claimed in respect of the entirety of the investigation, including, for example, the investigation interviews and the final report. Depending on the circumstances this can be critically important. That said, the organisation may have its own good reasons for not wanting to claim privilege over the investigation (or at least waiving any such claim). Also, privilege will not apply in all circumstances; for example, if the investigation is simply a fact-find without any legal advice regarding, or recommendations arising out of, the issues under investigation. Depending on the subject matter, it can be better to have an HR consultant conduct the investigation with the lawyers providing privileged advice in the background.
What should an organisation consider before starting an investigation?
The first consideration should be the scope of the investigation. There should be a scoping document, which will typically be in the form of terms of reference defining the questions or issues that the investigator will consider and the purpose of the investigation. The terms of reference should also clarify whether the investigator will simply be answering the questions in the document, or whether they will be making wider recommendations.
Other considerations that will need to be addressed include:
- Who is going to conduct the investigation? As above, this could be a lawyer, an HR consultant, or an internal or external specialist.
- Will the investigation be conducted on a privileged or open basis?
- Closely linked to the question of privilege is what the ultimate output of the investigation will be – a written or an oral report – and who the intended recipients will be?
- Who will need to be interviewed as a witness? Do any witnesses need to be advised to seek separate legal representation?
- What will need to be reviewed as evidence, and how is the evidence going to be obtained? This process will need to be fluid as the investigation unfolds.
- Who will support on the investigation internally – who will gather the evidence, who will provide instructions, and who will the investigator report to? The investigation team should be formed at the outset and will typically involve HR, Legal and someone from the business.
- If there is existing or potential regulatory interest in the investigation, how to interact with and keep the regulator informed during the course of the investigation?
What other people issues should be considered?
There will be two categories of individuals to consider:
- the accused or anyone who might be suspected of wrongdoing; and
- any witnesses or people who will be interviewed (including any complainant or whistle-blower).
Those accused or suspected of wrongdoing may need to be suspended during the investigation, so that they don’t have access to systems or (in theory) colleagues, and they cannot interfere with the investigation.
Witnesses may be reluctant to speak up. They may feel worried about repercussions. Or they may feel guilty about potentially ending someone’s career. Giving witnesses comfort will be critical to the successful investigation of issues.
The company should consider what support individuals involved need during that period. Sometimes those raising issues will have had traumatic experiences. And the accused may be facing career-ending allegations. Over recent years, in addition to taking legal advice companies have increasingly sought advice from mental health experts on issues to consider in such matters.
