The regulatory references regime is part of a wider package of reforms aimed at improving accountability in financial services. The FCA and the PRA have now issued long awaited policy statements (PS16/22 and PS27/16) setting out feedback on consultation and the final rules on regulatory references. Regulatory references are primarily a tool for firms not regulators and it is hoped that best practice will develop to address misconduct and assess fitness and propriety (F&P).
Who does it apply to?
The regulatory references regime applies to banks, building societies, credit unions and PRA investment firms (known as relevant authorised persons, ‘RAPs’), the Society of Lloyd’s and Solvency II or large non-directive insurers recruiting candidates to:
- senior management functions (SMFs)
- senior insurance management functions (SIMFs)
- FCA controlled functions (CFs)
- significant harm functions (SHFs)
The regime is also of interest to individual candidates for regulatory rules in the Senior Managers and Certification Regime (SM&CR) and the Senior Insurance Managers Regime (SIMR).
Once the SM&CR is extended to all other firms authorised under the Financial Services and Markets Act 2000 (FSMA) the regulators will decide whether to extend some or all of the regime to all regulated firms.
In this briefing, RAPs and insurers shall collectively be referred to as ‘firms’.
The full FCA/PRA regime will come into effect on 7 March 2017 to coincide with the implementation of the full certification regime and application of Conduct Rules to ‘other conduct rules staff’.
Regulatory References: the rules in outline
To recap, under the regulatory reference regime firms must:
- obtain references before regulatory approval or certification (subject to ‘Key Changes’ below)
- take reasonable steps to collect regulatory references for regulated roles for the past six years
- include breaches of Conduct Rules, breaches under the Statements of Principle and Code of Practice for Approved Persons ‘APER’ and details of disciplinary action taken (subject to ‘Key Changes’ below)
- update references where matters arise that would affect any reference given in the past six years
- make disclosure in the form of the mandatory template provided, even where there is no relevant information to disclose
- not enter into any arrangement or agreement that limits a firm’s ability to disclose relevant information
Regulatory references should focus on regulatory matters only (e.g. F&P or confirmed misconduct) and contain the following:
- details of any certification function or controlled function or of any notified NED, credit union NED or KFH role held, summarising the role
- details of any other roles performed while an employee of the firm (or any firms in the same group – subject to ‘Key Changes’ below) in the last six years
- details where a regulated firm has concluded at any point in the last six years that a candidate was in breach of the Code of Conduct sourcebook (COCON) or APER or breaches of a PRA Conduct Rule or a Conduct Standard and the background facts (subject to ‘Key Changes’ below)
- details where the firm has concluded that at any point in the last six years that the candidate was not fit and proper to perform a function and the background facts
- details of any disciplinary action as a result of the two points above
Firms should not overlook their duties at common law when providing a reference. When a reference is provided it must be true, accurate and fair and not give a misleading impression. If a firm goes beyond what it should put in a reference or gives inaccurate/ misleading information there are potential areas of tortious liability such as negligent misstatement, defamation or malicious falsehood.
The regulators have not provided for an individual to have a right of reply to a regulatory reference although they have suggested that fairness may require a firm to give an employee an opportunity to comment.
Key changes to rules
- the regulators noted the potential difficulties in obtaining references from non-financial services firms and overseas firms but underlined the obligation for firms to take reasonable steps to obtain a reference. Each firm should judge what constitutes reasonable steps and where necessary discuss this with the regulator as part of the authorisation process. The PRA states that it will take into account any relevant legal impediments when assessing whether a firm has taken reasonable steps to obtain information from overseas firms
- the FCA has added guidance to say that it expects regulated firms to provide a reference within six weeks
- firms within a group do not have to request a reference from each other where the group has centralised records or alternative means of sharing relevant information as part of the F&P assessment
- where requesting or providing a reference would require the making of a public announcement/ market-sensitive notification references can be obtained at any time during the application process. In some circumstances, where there are other legitimate reasons, references can be obtained no later than one month before the end of the application process
- reflecting the recent change to FSMA (section 64C), firms need only include reference to breaches of the Conduct Rules/Standards/APER where disciplinary action has been taken. Suspensions pending an internal investigation do not constitute ‘disciplinary action’
- the regulators have provided guidance on the level of information to be provided in the standard template. A reference should provide a factual description of the breach including dates, the basis for disciplinary action and the outcome
- the requirement for details of responsibilities to be provided in addition to an individual’s role has been removed
- firms may change the format of the template and add qualifying information
- the template has been changed so that regulatory references can now be provided on a group basis
- firms now only need to provide an updated reference to the current employer. The updating firm must ask whether the firms to which it has provided a reference in the last six years currently employ the individual
- the six-year look back period starts on the date when the individual’s employment with the firm terminates (including notice or garden leave etc.)
- serious misconduct that occurred more than six years previously should be disclosed if it comes to light within six years from the date the individual left the firm
- the record keeping requirements have been limited to six years retention of disciplinary and F&P findings
- a firm is not in breach if the reference does not include something for which the firm is not required to keep records
- the obligation to provide a reference on request is extended to include candidates for pre-approved, certified and certain PRA-specified roles
- disclosures should be what a firm reasonably considers to be relevant
- the reduction or recovery of remuneration should only be notified to the regulator and included in a regulatory reference if it is imposed due to breach of an individual conduct requirement
The FCA has also offered guidance on fairness and examples of the duty on firms to exercise due skill and care when preparing a reference. It has retained its guidance that, where feasible, firms should conclude open investigations.
Summary of requirements
|Requirement||Banks and insurers||Small non-directive insurance firms||FCA only-authorised firms|
|Provide reference for candidates for SMFs, SIMFs, CFs, Certification functions, KFHs and Notified NEDs||Y||Y||Y|
|Request references for past six years||Y||N||N|
|Include mandatory information||Y||N||N|
|Use mandatory template||Y||N||N|
Looking ahead: what should we be doing now?
Firms will need to prepare for the advent of the new regime in March 2017. In particular, firms should be:
- reviewing disciplinary procedures
- putting in place policies, practices and procedures which deliver clear, accurate and compliant references
- enhancing systems and control requirements relating to the retention of records and ensuring that retention policies are proportionate
- ensuring that their HR, IT and record-keeping processes and systems comply with the new regime
- ensuring that SMs are fully familiar with the terms of the template and their duties under the new rules and at common law
- preparing for a possible increased risk of litigation where an individual disputes information contained in a reference. It is likely that individuals will be more ready to litigate in order to ‘clear their name’
- ensuring that no references are provided on ‘agreed terms’