Last week, the Financial Conduct Authority (the FCA) published a Final Notice against Ashkan Zahedian following his conviction for serious violent offences. The Final Notice withdraws the approval granted to Mr Zahedian to perform a Senior Management Function (SMF) and places a blanket ban on him from working in the financial services sector in the future¹.

Background

Mr Zahedian was the sole director of a consumer credit firm and had been authorised by the FCA in that capacity since January 2013.

In February 2020, and whilst an approved person but not in a work context or event, Mr Zahedian was involved in an altercation at a bar, during which he used a machete to assault a security guard. Following his arrest, he pleaded guilty at Lewes Crown Court to grievous bodily harm and for possession of the machete, and was sentenced to three years' imprisonment. It was accepted by the judge in his sentencing remarks that Mr Zahedian's actions were out of character and unlikely to be repeated, but that he had intended in his actions to cause really serious harm. The incident and subsequent sentencing was widely publicised by both a major news outlet and local press at the time.

Decision

In order to be authorised by the Regulator, an individual must be "fit and proper". This requires an ongoing evaluation of an individual's honesty, integrity and reputation, competence and capability, as well as financial soundness. In the FCA's view, Mr Zahedian's conviction meant that he was no longer fit and proper, or capable of being so, on two grounds: a lack of integrity and the damage to his reputation.

Such a view was formed, firstly, as a result of the conviction itself. The FCA formed the view that the nature and circumstances of Mr Zahedian's actions demonstrated "a clear and serious lack of integrity". This decision was taken notwithstanding that the criminal offence for which Mr Zahedian was convicted did not involve dishonesty, that Mr Zahedian had entered an early guilty plea and had no previous convictions, and despite the sentencing remarks of the judge, who accepted that the actions were out of character. It appears therefore that the conclusion was that the offence was so serious that it evidenced a lack of moral judgement or integrity without the need for this to be linked to dishonesty or to his conduct in the workplace.

Secondly, the FCA concluded that the offences and the associated publicity Mr Zahedian received resulted in him no longer having the "requisite reputation to perform functions in relation to regulated activities". In essence, this conviction and the associated adverse publicity would likely damage the reputation of a regulated firm where he may work in the future, should he be approved as an SMF again².

Thoughts and looking forward

In taking this action, the FCA appears to be making a firm statement that it does not agree with the decision of the Upper Tribunal in Frensham³. In that case, the FCA had sought to prohibit an approved person convicted of a sexual grooming offence, on the basis that the conviction meant that he could not meet the requirements under the fitness and propriety test, as he lacked integrity and the necessary reputation to carry out regulated activities.

Although the Upper Tribunal agreed that such an offence undoubtedly evidenced a lack of integrity, or "ethical compass", it stated that, for regulatory action to be justified, the FCA must holistically consider whether the failings of personal integrity also amount to failings of professional integrity. It was decided by the Upper Tribunal in Frensham that, although it was not satisfied that a decision to make a prohibition order against Mr Frensham based solely on the conviction could reasonably be made, where the offence was considered in light of the circumstances in which it was committed and his subsequent failure to be honest about matters connected to his conviction in his dealings with the FCA, the decision to prohibit was one which was reasonably available to the FCA.

It appears to us that decisions such as that of Mr Zahedian, which hold mitigating features not present in the decision made in respect of Mr Frensham, may be more open to challenge as to the reasonableness of a blanket prohibition, in circumstances where it was open to the FCA to revoke his permissions and consider any future application as and when it may be submitted, taking into account any rehabilitation he may evidence at that point.

Nonetheless, the FCA's view seems to be that, even in the absence of dishonesty and clear evidence of future risk to consumers, an offence will, when serious enough (a distinction which will itself no doubt give rise to debate in the future), justify a finding that the individual is no longer fit and proper. This is a significant step forward and sends a strong message both to those performing senior manager roles to be on their best behaviour at all times and to firms monitoring and signing off on the fitness and proprietary of approved persons.

As a general approach, it also raises questions of fairness and of the Regulators' role in arguably going above and beyond punishment which may be imposed in the criminal courts following criminal conviction, which we anticipate may, if followed in other cases, be challenged at the Upper Tribunal. Certainly, there are arguments that the FCA's approach here is a harsh, long-term consequence indeed for a one-off act that arguably is not sufficiently connected to an individual's ability to perform a regulated role well. While it sends a message, the decision also generates new debate (for example, on whether the outcome would justifiably be different in instances where the role may have no public-facing function).

The Senior Managers and Certification Regime (SMCR) has been in place since 2019 and was, at the time of implementation, described by the FCA as "an opportunity to establish healthy cultures and effective governance in firms by encouraging greater individual accountability and setting a new standard of personal conduct". In line with this, new Individual Conduct Rules were implemented under COCON 2.1.

Rule 1 of COCON states that an individual must act with integrity. The FCA has been clear that integrity is a key determiner when assessing fitness and propriety of SMFs and, unsurprisingly, has been reluctant to shift from this position. While firms have had a while to get used to the requirements under the SMCR regime and COCON, it is worth noting that the list of examples provided in the FCA handbook to exemplify a breach of the requirement to act with integrity does not include examples of non-financial misconduct. Instead, cases such as Frensham and this decision provide useful guidance for firms and serve as a warning.

From Dentons' perspective, we think that firms should be mindful of the direction being signposted in this area in considering how to approach and sanction employee misconduct, both within and outside the workplace. In particular, it is worth considering now (i) what policies and processes are in place for the firm to become aware of such issues and (ii) how clear its expectations and likely attitude to misconduct outside the workplace currently are to employees and directors subject to fitness and propriety requirements.

While we wait and watch this space, we anticipate that enforcement intervention is likely to continue. Firms should consider how they can create a culture of compliance and emphasise the "tone from the top" to help maintain high standards. Supporting employees by ensuring they are provided with sufficient training to remind them of their obligations under the SMCR regime and COCON, as well as keeping them alert to FCA decisions in this area, may serve as useful reminders for employees to exhibit their best behaviour, inside and outside work.

Firms should also encourage employees to speak up, as creating a safe space for this will enable them to be promptly notified of potential misconduct and take action to protect both the firm and its employees. As far as non-financial misconduct is concerned, firms should act quickly to investigate allegations of such misconduct and carefully consider their requirements to notify the FCA at the earliest opportunity.

If you are interested in this area and would like to discuss the approach being taken by your firm, please contact Katharine Harle or a member of Dentons' Regulatory and Investigations team.

1. FCA Website, Press Release
2. The Final Notice for Mr Zahedian, pages 2-3
3. John Frensham v. Financial Conduct Authority [2021] UKUT 0222 (TCC)