The new banking regime, which came into force on 7 March, has introduced major regulatory change for those in the banking sector. This includes proposed changes in respect of the provision of references for those working in the sector, although these have been delayed and final clarity is expected this Summer.
It is common practice for many employers (including those in the financial services sector) to provide an out-going employee with a bland standard form reference simply confirming role and dates of employment. This practice has enabled those with a poor conduct history to move around in the financial services sector reasonably unchecked. In order to address this the FCA/ PRA have proposed new rules which not only require relevant firms and insurers to request a reference from a candidate’s previous employer(s) covering the previous six years of their employment (whether that previous employer is an authorised firm or not), but also for references to be provided in a specific format. This requirement applies to persons going into certain categories of role, including those in the senior managers and certification regimes. It also means that an employer may be required to seek a reference from another company in the same group.
The proposed form of reference requires the provision of minimum mandated information including: details of any certification function or controlled function held and the role and responsibilities involved (including such roles performed within the same firm/ group); where the firm has concluded at any point in the previous six years that the candidate was in breach of the new conduct rules or was not fit and proper to perform a function and the facts that led the firm to reach that conclusion and details of the basis and outcome of any disciplinary action as a result (including any formal warnings or changes to remuneration).
As well as the obligation to provide a reference in response to a request for one a firm has an on-going obligation under the new rules to update a reference where it becomes aware of matters that cause it to draft that reference differently if it were drafting it now. This is most likely to have impact if a firm discovers something after an employee has left which leads the firm to conclude that there has been a breach of the conduct rules or standards.
In addition to the above new requirements, firms remain subject to an existing regulatory obligation to provide all information relevant to a hiring firm’s fit and proper assessment. Firms should not enter into arrangements which restrict the firm’s ability to comply with the requirements on references, and the new reference regime includes a specific rule to this effect. For example, a firm should not include provisions in either a contract of employment or a settlement agreement which contradict the new requirements. Whilst to do so would create a valid contractual obligation the regulators and courts are likely to have little sympathy for an employer who seeks to avoid its regulatory duties by relying on such a provision.
Employers remain subject to the common law requirement to ensure that references are fair, accurate and not misleading. Compliance with this is important to avoid potential liability to ex-employees but also new employers that rely on the information in a reference. Further, employers will have on-going duties to individuals if they are still an employee at the time that a reference is provided to their potential new employer. Firms will therefore need to take care to ensure that whilst they comply with the obligation to provide all information relevant to a hiring firm’s fit and proper assessment that at the same time the contents of a reference do not expose them to claims.
Feedback from stakeholders in relation to the FCA/ PRA proposals on references was generally supportive although particular concerns were raised about the practicalities of updating historic references and the timetable for implementation. The FCA/ PRA intend to publish final rules this Summer and have indicated that there may be a transitional period to allow firms time to implement the changes. In the meantime firms should take the opportunity to review standard documents, including contracts of employment and settlement agreements, review internal policies on the provision of references and put in place robust record keeping arrangements.