Arthur Andersen’s recent debacle has reminded us all of the importance of
upholding financial services standards. Phil Boucher examines HR’s new responsibilities in regulating a
sector particularly vulnerable to the actions of rogue employees
First there was D-day. Then VE-day and VJ-day. And more
recently Y2K-day. But if you work in HR within the financial services sector
you are probably more concerned with the N2-day that took place on 30 November
2001.
On N2 day there was no end to war and the world didn’t fall into an
IT-inspired Armageddon. In fact, the only thing that happened was some
seemingly harmless legislation – the Financial Services and Markets Act 2000 –
came into operation.
But hidden beneath its exterior lurk some important implications for a whole
range of HR issues including recruitment, whistleblowing, employment contracts
and training within the financial sector. HR departments that fail to stay
abreast of these are likely to incur the wrath of a newly invigorated Financial
Services Authority.
Put simply, the N2 regulations have created a single regulatory regime for
the financial sector. The intention is to create a system where all financial
services employees are closely regulated by the FSA, in the hope that it
prevents the Nick Leesons of this world from rearing their expensive heads ever
again.
As a result HR now has to keep meticulous records of all its employees’ job
movements and promotions. It also has to ensure that all financial workers are registered
with the FSA. This is having a major effect on the recruitment of new workers.
Olivia Sinfield, solicitor at Osborne Clarke, says: "Anybody who’s
employing now has to ensure that the people they are taking on are authorised
by the FSA. They have to check that they are fit and proper for their role,
check that they’re up to doing the job, check that they are competent, and
check all of their qualifications thoroughly."
If HR doesn’t do this and it later transpires that an employee is
unqualified or even banned from working in the financial markets, the firm is
liable to face action from the FSA.
To head off this potential problem at the recruitment stage, employers have
to take up all references, check academic and work histories, and possibly analyse
the candidate’s financial situation. It may even be prudent to run a search for
county court judgements – although the individual’s consent must be obtained
first.
Jonathan Carr, associate at Allen & Overy, says: "HR has to check
anything that affects a candidate’s fitness to work in the City. They have to
think about anything that may affect the honesty and integrity of the person
and anything that might damage the standing and reputation of the
employer."
The FSA has indicated that the approval process should not take long to
complete, as only those who are new to the sector will face a full examination
of their character. But the FSA has a period of up to three months in which to
determine whether someone is fit to do a specified job.
To smooth this process employment lawyers suggest it is best for HR to make
the responsibilities of the job as clear as possible during the recruitment
process. This includes detailing the level of supervision the position will
have.
"Regulatory clearance has always been important but now it’s
crucial," says Anna Fletcher, associate in the employment team at Wragge
& Co. "HR recruitment needs to make sure that the person meets the
standards of fitness and propriety laid down by the FSA. And this can be
affected in so many ways that recruiters have to think very carefully about the
action they take."
If the applicant is judged as a fit and proper person to perform the
relevant function then the application will be granted. However, this may take
time and require the starting date for employment to be moved back.
Once the individual starts work they must continue to remain fit and proper
and observe the standards of conduct expected by the FSA. HR also has to keep
the FSA informed of any promotions or transfers. More importantly, the employer
must explain to the employee that any career advancements are subject to them
continuing to have regulatory approval. If an individual is promised promotion
without these conditions attached and it is subsequently denied because their
approved status is withdrawn or refused, there is a risk that they could resign
and claim constructive dismissal on the grounds that the duty of mutual trust
and confidence has been breached.
Given that an unfair dismissal claim can now net up to £51,700, it is an
eventuality that HR will want to avoid if at all possible. As Carr says:
"It is basically ensuring that people are in the right place by beefing up
all the regulations around promotion and staff assessment."
The surest way of doing this is to make sure that employees know everything
hinges on them maintaining fitness and propriety. Line managers responsible for
in-house promotion must also be informed that any offer is made with the
condition attached. Job offers, job descriptions, letters of appointment,
contracts of employment and staff handbooks must all set out that an individual
is obliged to act in accordance with the statements of principle issued by the
FSA. This should be continued for the induction process and any appraisal or
training documentation. And most importantly, this paper trail has to be kept
on file in case of proceedings at a later stage.
Jonathan Chamberlain, partner in the employment team at Wragge & Co,
says: "N2 requires increased monitoring throughout the employment
relationship. The intention is that from an HR perspective all your
documentation, training and appraisals are in order and accountable to the
FSA."
In extreme cases the FSA can remove a firm’s licence to trade if it is found
to have knowingly allowed negligence and gross misconduct to occur. However,
this is only likely if there is a continued and blatant flaunting of the
regulations.
In most instances it is the individual alone who will be sanctioned,
resulting in anything from the removal of FSA approval to unlimited fines and a
published statement of misconduct.
HR can limit the extent to which this reflects on a firm’s reputation by
openly taking a proactive approach. If the FSA can see that a firm is taking
the issue seriously it is less likely to interfere. The best way of doing this
is through a written disciplinary procedure that stresses individual
accountability. The FSA is also likely to allow managers to escape unpunished
unless it can be proven that they have knowingly allowed the misconduct to
occur.
The arrival of N2 has put much greater emphasis on the whistleblower.
"N2 creates a positive duty to blow the whistle within an
organisation," says Carr. "HR has a role to play in developing the
idea that it is every employee’s professional duty."
While the FSA may have increased powers, it looks set to take a fairly
low-key approach and allow the 10,500 firms involved to run their own affairs
where possible. However, HR has to ensure that all employees are competent,
appropriately supervised and trained, and capable of performing their job to a
high standard of competence, and it is here that the paper trail is most
important. If the FSA discovers that the firm has failed fully to check the
employee’s performance and suitability for the position it is liable to face
further action – even if the individual is by then working for someone else.
Staying on the right side of the FSA
The FSA handbook does not describe
precisely what HR has to do as a result of the new regime. But these are some
of the issues that HR should be aware of in the short term.
Recruitment
Check the background of potential recruits. While HR has a duty
to look into a person’s history, it has to be done within the confines of the
Data Protection Act and the new code of practice. This means all applications
have to be treated on their individual merits, as the background checks must be
both necessary and relevant to the position.
Along with checking references HR has
to find out if a candidate is financially sound. The easiest way of doing this
is through an agency. For this it is vital to get the consent of the subject,
particularly when vetting for issues such as past disciplinary action,
bankruptcy or CCJs.
Employment contracts
N2 emphasises the need for a high standard of professional
competence. If people fall below the required standard HR needs to be able to
take action. For this reason, financial employees’ contracts of employment
should be changed to allow for dismissal in circumstances where standards of
fitness and propriety are breached or FSA rules broken. This will make it far
easier for employers to dismiss for gross misconduct in such situations.
Disciplinary procedures
While it used to be the case that disciplinary notes were spent
after a couple of years it is now important to keep hold of them for far longer
under N2 because you may need to produce them a couple of years down the line
to show what action an employee (or former employee) has faced.
