Insights

14 July 2023

Culture and Non-Financial Misconduct in the Spotlight: Key Messages from the Odey Fallout

Introduction

The fallout from the Crispin Odey revelations in the Financial Times (“FT”) has been seismic. Following its initial report into allegations raised by 13 women against Odey regarding harassment, abuse and fostering a toxic workplace culture (allegations which are denied), in less than a month Odey’s reputation has been shattered and the ability of his firm, Odey Asset Management, to weather the storm has been thrown into serious doubt.

The Financial Conduct Authority (“FCA”) has also found itself in the spotlight, with the government’s Treasury Committee publicly probing its supervision of Odey and Odey Asset Management and its commitment to investigating non-financial misconduct. Against a backdrop of increasing parallels and pressure in a range of other sectors, from the CBI in the public sector to the recent report in the sports sector exposing sexism, racism, elitism and class-based discrimination in cricket, dealing with allegations of a toxic work culture and non-financial misconduct should be at the top of all firms’ agendas.

This article considers the Odey allegations, why all eyes are on the FCA and the key lessons that can already be learned from this latest scandal to hit financial services.

The Odey Fallout

Information regarding the Odey allegations remains largely confined to the FT’s investigative reporting.

The FT first reported the serious allegations against Odey on 8 June 2023. This included 13 women who worked at Odey Asset Management and alleged that Odey abused or harassed them, with eight alleging he sexually assaulted them. The incidents were reported to have occurred between 1998 and 2021 both within and outside the workplace and contributed to an abusive workplace culture. On 7 July 2023, the FT reported allegations from another six women, including allegations dating back to 1985.

Following the allegations, multiple institutions have started the process to wind down service agreements and/or sever ties with Odey Asset Management. The firm is now in advanced talks to move funds and staff to other asset managers in order to control the damage. Further, as of 17 June 2023, the FCA imposed restrictions on Odey Asset Management prohibiting it from disposing of its assets, without consent.

FCA in the Spotlight

Following the FT’s exposé, questions have been raised regarding the FCA’s role and effectiveness in investigating Odey.

The paper reported that in early 2021, the FCA was provided with an internal investigation report from Odey Asset Management that concluded that the financier had at times behaved inappropriately with female staff. The report allegedly indicated that Odey had been given a formal written warning by the firm’s executive committee and told to no longer communicate with female staff about non-work matters, nor invite female staff to lunch or engage in unwanted touching. The FCA subsequently opened an investigation into alleged non-financial misconduct over an 18 year time span, from 2003-2021. Whilst Odey allegedly challenged the FCA’s probe, threatening to bring a judicial review against the regulator, this did not stop the FCA’s investigation and it was reported that the enquiry later shifted to examine corporate governance issues after Odey fired his executive committee in 2021.

In view of the seriousness of the allegations, on 14 June 2023, Harriet Baldwin MP, Chair of the Treasury Committee, wrote to the FCA with urgent questions on the Odey case as well as broader questions in connection with the regulator’s approach to non-financial misconduct and seeking assurances that sexual misconduct falls within the scope of its regulatory conduct.

The response on 3 July 2023 from Nikhil Rathi, Chief Executive of the FCA, contains several interesting points. Notably:

  • The FCA reiterated its long-standing view that a corporate culture that tolerates sexual harassment or other non-financial misconduct is unlikely to be one in which people feel able to speak up and challenge decisions, or one in which they will have faith that concerns will be independently and fairly assessed. Such a culture also raises questions about a firm’s decision making and risk management. It reaffirmed that the FCA’s focus has to be whether and how non-financial misconduct affects the delivery of its objectives of “protection of consumers, integrity of the market and promotion of competition in the interests of consumers.”
  • The FCA provided further information regarding its supervision of Odey Asset Management, stating that it had been “intensive” since 2020. It confirmed that it opened its investigation in mid-2021 and is investigating Odey for possible contraventions of the FCA’s Principles for Business for failing to conduct its affairs with due skill, care and diligence, and failing to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems and controls. The FCA also confirmed that it is investigating whether these possible contraventions occurred in circumstances where Odey Asset Management may have failed to have, or risked failing to have, a functional and compliant governance structure.
  • There are limitations to the FCA’s powers when it comes to supervising firms and non-financial misconduct. In particular, the FCA referred to the case of Frensham, where the Upper Tribunal ruled that the FCA could not ban an individual based purely on his conviction for child sexual grooming but could ban him for failing to disclose the conviction to the regulator. This case served to highlight that where an individual has been acquitted of criminal charges, there may be significant challenges for the FCA in using the same evidence to justify the use of its formal powers.

While the FCA stated that its response to questions relating directly to the Odey matter was “necessarily limited” since its investigation remained ongoing, further scrutiny is expected when Nikhil Rathi gives evidence to the Treasury Committee on 19 July.

Key Messages

Whilst the fallout is still ongoing, the Odey matter is a stark reminder of the importance of prioritising culture within the workplace, in particular for firms and individuals in the regulated financial sector, although with wider application across multiple sectors.

1. Internal Considerations

a. Promote a “culture of decency”

     i. Firms must ensure they have a proper governance system and framework in place which encourages and promotes respect in the workplace.

     ii. Regularly remind employees of expected and unacceptable conduct.

b. Have a robust whistleblowing policy and promote speak-up programmes

     i. Ensure that there is a positive tone from the top and reiterate the importance of a speak-up culture and no-retaliation policy.

c. Thoroughly investigate and record any allegations of misconduct

     i. As reiterated in the FCA’s letter, the FCA expects firms to have adequate governance procedures in place and to properly investigate allegations of misconduct.

d. Understand your reporting obligations

     i. Transparency and openness with the regulator is key.

     ii. Issuing legal threats to judicially review an FCA investigation will not stifle an investigation (although legitimate objections should be considered).

 

2. Business & Reputational Considerations

a. Know who you do business with

     i. Do your due diligence and on-going monitoring to ensure that your business ties are with reputable companies.

b. Potential speed of escalation

     i. Be on the front foot and act quickly and decisively in investigating and reporting where required. Reputation can plummet, with stark commercial and financial consequences.

 

3. Regulatory Considerations

a. The FCA is taking a more assertive stance

     i. The FCA’s determination to tackle non-financial misconduct is self-evident. It is currently considering a further six banning cases involving criminal convictions for a wide range of sexual and other offences and it has two open enforcement investigations related to non-financial misconduct.

     ii. Powers in the Financial Services and Markets Act 2023 enable the FCA to place conditions upon new controllers, which the FCA has stated in its letter to the Treasury Committee will further assist it in dealing with misconduct in the future.

 

 

 

 

 

Conclusion

It is now almost five years since the FCA famously announced in 2018 that “non-financial misconduct is misconduct pure and simple”.

The FCA continues to reiterate its expectation of “high standards of character, probity and fitness and properness from those who operate in the financial services industry” based on its long-standing view that “an unhealthy culture can lead to poor governance and poor outcomes”, engaging its statutory objectives.

It is also important to acknowledge that the FCA has taken action on non-financial misconduct. While no financial penalties have yet been issued, to date, it has publicly prohibited seven individuals for various types of non-financial misconduct, including sexual assault (Cochran), voyeurism (Horsey), possession of indecent images of children (Jameson), serious assault (Zahedian), offences relating to meeting a child following sexual grooming (Frensham), non-payment for railway tickets (Burrows) and use of work email to send inappropriate messages (Flowers). Five of these prohibitions have been issued within the past three years, highlighting its closer attention in this area. In addition, Nikhil Rathi has indicated that two enforcement investigations into non-financial misconduct are currently ongoing.

The FCA alone cannot handle the volume of allegations as they arise and firms should consider steps they can take themselves in these situations, including investigating swiftly and taking disciplinary action (including suspension) of employees where appropriate.

Finally, from the regulatory perspective, following the decision in Zahedian, there have been widespread calls for greater clarity.  The FCA has confirmed that we should expect its long-awaited guidance “later this year”.

Odey piles on yet further pressure and urgency. There is still much work to be done.

 

This article was first published by LexisNexis. 

“It is also important to acknowledge that the FCA has taken action on non-financial misconduct. While no financial penalties have yet been issued, to date, it has publicly prohibited seven individuals for various types of non-financial misconduct…”

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