In the wake of the #metoo movement, and a series of well-publicised scandals across all sectors, behaviours in the workplace have come under heightened scrutiny from courts, Parliament, regulators and the media.
The legislative landscape has been substantially remodelled to introduce a new proactive obligation on all employers to take preventative measures to stop sexual harassment, and for businesses authorised by the Financial Conduct Authority (FCA), non-financial misconduct (NFM) will be brought expressly into the scope of the Conduct Rules from September 2026.
These developments have important implications for private capital managers, including in relation to investor due diligence, portfolio oversight, fitness and propriety assessments under the Senior Managers and Certification Regime ((SMCR) which itself is the subject of a current FCA consultation), and key person and reputational risk. It is not possible to control conduct, but having the right policies and processes in place will mitigate employment, regulatory and reputational risk if conduct issues arise.
Preventative duty
Sexual harassment has been a feature of anti-discrimination legislation for decades. For these purposes, sexual harassment means any unwanted conduct of a sexual nature that violates the victim’s dignity or creates an offensive, hostile, intimidating, humiliating or degrading environment for them. That definition is broad and captures a range of problematic behaviours such as inappropriate jokes and pranks, social media posts, physical gestures, touching and serious sexual assault. Importantly, the victim does not need to be specifically targeted, and there is no de minimis threshold, so that a single act can create liability.
With effect from October 2024, employers are under an additional proactive duty to take reasonable steps to prevent sexual harassment “at work”. The concept of work in this context is wide, and would include, for example, management presentations, diligence site visits, board meetings at portfolio companies, fundraising roadshows, investor conferences and manager-sponsored social events. Many of these interactions will be with third parties such as investors, advisers, bankers, founders, co-investors and LPs. Some of them are evidently more difficult for the manager to control than others.
What amounts to a reasonable step will vary according to the resources available to the manager such as the degree of risk or the potential harm. Guidance from the Equality and Human Rights Commission recognises this. In most cases, a risk assessment mapping out particularly high-risk interactions is likely to be a sensible first step, that can then be coupled with policies, a reporting system, training and monitoring to provide a safe and effective means of identifying and addressing any problematic issues.
Aside from the obvious cultural and employee-relations impacts of sexual misconduct, particularly in terms of recruitment and retention, investors increasingly assess culture and governance as part of their due diligence, and portfolio companies are scrutinised on their employment and HR practices. There is therefore a brand management and stakeholder relationship upside where a clean bill of health can be demonstrated.
Workplace relationships
Consensual workplace relationships arise in every sector and create material risks, particularly in lean, partner-led businesses. This can include: conflicts of interest, perceived favouritism, confidentiality breaches and; exposure to harassment or coercion, particularly where there is a power imbalance.
Rather than adopting blanket bans, which are often counterproductive and difficult to enforce, many firms have implemented nuanced workplace relationship policies that balance privacy with risk management and employee safety. A well-designed policy should define, in plain language, the types of relationships covered and the circumstances requiring disclosure. It should require prompt disclosure of relationships involving reporting lines, influence over pay or promotion, or access to sensitive information. It should set out the potential responses available to the firm in order to manage risks, such as changing reporting lines, limiting decision-making authority, putting in place information barriers, or removing the employee from remuneration decisions affecting their partner.
For managers with portfolio board seats, the policy should address relationships with portfolio executives and service providers, including expectations of disclosure to the manager and the portfolio company, and how conflicts will be managed at board level.
There is an important overlap here with sexual harassment, as the legislation specifically calls out unwanted conduct that is, effectively, retaliation for having rejected a sexual overture. Workplace relationships that breakdown can be common triggers for complaints of this type of harassment.
FCA focus on NFM
The FCA has long treated sexual misconduct, bullying and harassment as potential NFM falling within the scope of potential regulatory enforcement.
The FCA has now confirmed that, with effect from 1 September 2026, a new rule will be introduced into COCON, which will confirm that unwanted conduct that: (i) has the purpose or effect of violating an individual’s dignity or creating an intimidating, hostile, degrading, humiliating or offensive environment; or (ii) is violent to an individual, can result in a breach of the conduct rules. This will apply to all FCA authorised firms.
This definition is not limited to sexual harassment, or harassment related to a protected characteristic (age, race and so on) and therefore brings a broader range of bullying and abusive conduct into scope. The expanded scope of the Code of Conduct (COCON) will have implications for regulatory references and serious cases of NFM will need to be disclosed to new employers.
The FCA is also consulting on additional handbook guidance on the application of COCON and the Fit and Proper Test (FIT), which the FCA may finalise in due course depending on feedback received to its consultation. This includes proposed guidance to support firms in assessing whether NFM is sufficiently serious to amount to a breach of the conduct rules and in conducting fitness and propriety assessments.
For private capital firms that are authorised by the FCA, there is therefore a regulatory expectation to address NFM issues and internal policies (including compliance processes; F&P assessments where applicable; reference processes; codes of conduct; staff training; investigations protocols; and remuneration frameworks) should be updated accordingly.
Where there are FCA authorised portfolio companies, managers should ensure that procedures for portfolio governance include NFM as a relevant area for consideration and ensure that harassment allegations at portfolio level are promptly escalated, investigated and remediated, with the manager’s oversight documented.
Practical considerations
There is a clear need, across all sectors, to pay real attention to workplace behaviours. The legal and regulatory focus on harassment, sexual harassment, bullying and non-financial misconduct does not look likely to diminish, and for private capital managers, the breadth of third party interactions and the reputational sensitivity of portfolio level events increase the level of risk.
The key to mitigating these risks is to develop a focused, proportionate framework, based on a risk assessment at both house and portfolio level, supported by clear policies, effective reporting, targeted training and aligned incentives.
