Financial sector malpractice: employment law considerations

Financial sector malpractice: employment law considerations

Article Type: Strategic commentary From: Strategic HR Review, Volume 15, Issue 1

Richard Nicolle

Richard Nicolle is based at Stewarts Law LLP, London, UK.

Following regulatory scandals such as recent Libor and Forex rate fixing, individuals and companies have faced complex decisions on how to deal with the employment matters that arise. As well as heavy fines for companies and loss of income for individuals, the negative publicity that is brought upon both parties can harm future business and careers. Handling employment issues carefully but effectively can reduce the overall fallout and prevent unnecessary collateral damage.

Managing reputational damage

The heavily regulated financial sector is based on trust and honesty, so clients are greatly influenced by malpractice allegations and think twice about involvement with particular firms or individuals if their reputation is in question. In times of scandal, it has led to quick responses, with individual employees being either dismissed or suspended by firms when a problem erupts unexpectedly. From a strategic perspective, such approaches have enabled firms to wash their hands of offending employees to appease client trust.

Meanwhile, innocent individuals who have worked for a company that has been embroiled in scandals such as Libor or Forex might have their previous employment viewed in a negative manner at later job interviews. This can make it harder for ex-employees of these firms to continue their careers after they have made a decision to leave that employer, even if they had no involvement in wrongdoing. This often presents a more challenging problem to deal with.

Managing the legal logistics

Employment law offers solutions for both employers and employees caught up in malpractice scandals. Employees found guilty of criminal conduct may be charged with fraud or other dishonesty-based offences. Companies can usually avoid having to pay to terminate the individual employee’s contract in these circumstances by inserting into their employment contracts a termination clause to that effect. Its inclusion will avoid any unfair dismissal proceedings.

In the event of suspected malpractice, it is generally advisable that the individual employees in question should be suspended rather than dismissed until the findings of any investigations are known, even if significant negative publicity is being generated about the firm. Employees who have been punished without proof could use this to form a constructive dismissal case and then claim wrongful dismissal on the grounds that the reasons were unfair if they are later proven innocent.

Individual employees, meanwhile, should be mindful of the possibility of their reputation being harmed through association with an employer hit by scandal. Employees may rely on the implied contractual term of mutual trust and confidence following the case of Malik vs BCCI SA (in liquidation) [1997] if an employer is found guilty of dishonest business. This case was held to create an implied promise made by the employer not to engage in dishonest activities. If this promise is breached, then the employee will have a claim against that employer. This may be one way of seeking to compensate for the career damage that an innocent employee has suffered.

Prevention is better than cure

The Libor scandal and the Forex scandal were both based on traders taking advantage of their lack of supervision. Regulation has tightened up in this area, but companies can also implement clear appraisal-based systems to monitor and assess individual employees’ activities. If inaccuracies or other issues are found early, then the risk of serious scandals erupting can be reduced, safeguarding the reputations of firms and the individuals who work there. Alongside those precautions, specialist employment lawyers can anticipate the particular risks faced by employers and employees in the financial services industry and ensure that contracts are appropriately drafted to take them into account.

Corresponding author

Richard Nicolle can be contacted at: mailto:rnicolle@stewartslaw.com