New rules regarding references in the financial services industry come into force on 7 March as part of the Senior Managers Regime. What are employers’ obligations and what information must they include?
Six months ago, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) published new whistleblowing rules as part of the Senior Managers Regime – an initiative designed to improve culture and accountability in banks, building societies and other financial institutions.
With this backdrop, the FCA’s ongoing business plan for 2016/17 prioritises improving culture and governance within the financial services sector.
However, the onus will be on businesses themselves to lead this effort, with the regulators taking a step back. For example, banks and insurers have been made responsible for assessing and certifying the fitness and propriety of many employees who required approval by the regulators themselves.
So that they can step into the shoes worn by the FCA and PRA, banks and insurers must have access to some information the regulators had when considering approval applications.
These new rules will apply from 7 March 2017, requiring banks and insurers to obtain regulatory references when recruiting for certain roles.
Who is affected?
The obligation to obtain regulatory references only applies to banks and insurers. However, it is envisaged that this will be widened to include all authorised firms in due course.
The obligation to provide regulatory references applies to all authorised firms and it is expected that firms should be able to give a reference within six weeks of a request.
When are regulatory references required?
Regulatory references must be sought by a bank or insurer whenever it wants to recruit an individual into various specified roles. These include senior management functions and “significant harm” functions under the Certification Regime.
References must be sought from all former employers for the past six years, regardless of whether or not the former employer is an authorised firm.
Where the appointment requires approval by the FCA or PRA, firms should seek to obtain references before submitting the application for approval. For roles requiring certification, a reference should be obtained before a certificate is issued.
What information must be included?
Banks and insurers must provide the following mandatory information relating to the six years prior to the date of the reference request:
- Details of all roles held, including a summary of responsibilities.
- Any findings that the individual was not fit and proper and the facts which led to that conclusion.
- Details of any disciplinary action taken as a result of a breach of the FCA or PRA’s conduct rules. This includes the issue of a formal written warning, suspension (but not suspension pending an investigation), dismissal, and reduction or recovery of remuneration.
All authorised companies will be under a wider obligation to provide “all relevant information” that might be relevant to the their assessment of the individual’s fitness and propriety.
This is time-limited to information within the previous six years, except in respect of serious misconduct. In practice, firms will therefore need to check their records to see whether or not they show any serious matters at any time beyond the past six years.
Firms may also use the “all relevant information” section to add qualifying information, such as mitigating circumstances, subsequent corrective action or good conduct.
For example, the FCA guidance suggests that if a conduct breach is considered uncharacteristic of the employee due to an otherwise exemplary record, this information should be included.
In practice, employers should at least consider this, as a disclosure may otherwise be incomplete or unfair.
Companies must revise a reference given in the past six years to an individual’s current employer if they become aware of information that would have caused them to draft the reference differently, had they been aware of it at the time.
This should be approached with care to ensure updates are true, accurate and fair. In particular, where misconduct has come to light after a former employee left the company, it should consider how it might give the former employee an opportunity to respond to the allegation before updating the reference.
Investigations and disciplinary proceedings
Firms remain subject to the common law duty to take reasonable care to ensure information provided in a reference is true, accurate and fair.
This means they should seek to conclude investigations and/or ensure references can be justified based on documented fact, before including allegations of misconduct in a reference.
However, it is not always appropriate or possible to conclude an investigation, and the FCA and PRA have confirmed that firms are not obliged to do so.
This does raises uncertainty, though – for example, where an employee resigns while under investigation, should this be stated on the reference?
It is foreseeable that a business might decide a pending investigation is a relevant matter and should be disclosed. This may well be the most appropriate action in certain circumstances.
However, exercise caution, as including such information may imply that the employer has concerns regarding the individual’s fitness and propriety, despite having not investigated fully.
Firms must ensure that, in the absence of a concluded investigation, they take reasonable care to ensure that the facts are sufficiently established to justify a particular disclosure.
This should include providing the employee with an opportunity to respond to any allegations.
A right to comment?
It is likely that employees will wish to see their regulatory reference and many will want to comment on it.
While firms are expected to allow employees to respond to allegations against them, this does not extend to commenting on the reference itself.
If an employee does comment, this should be taken into account when deciding whether or not a disclosure should be made and how it is drafted, to ensure the reference is accurate and fair.
Firms must ensure that they do not enter into any arrangement or agreement with an employee which limits what can be disclosed.
This post has been updated. It originally appeared on 24 November 2016.