When handling a departure of an individual who performs a controlled function, it is crucial that there are the appropriate procedures in place to comply with the new Senior Insurance Managers Regime (SIMR), in force from 7 March 2016.

More significantly, however, are the proposed rules on regulatory references which were intended to come into force at the same time.  The purpose of this briefing is to set out a check list of matters to bear in mind when handling departures, as well as to set out the current state of play regarding the proposed rules on giving and obtaining references on change of role.  

This briefing is aimed at HR managers, legal and compliance.

The new regulatory references regime

As part of a firm's obligations to ensure that individuals appointed to a new role is fit and proper, the regulators have proposed a set of new rules concerning references.  The proposals were contained in a consultation paper issued in October 2015 and were expected to be in force by 7 March 2016, along with the rest of the new SIMR rules.  However, as consultation responses raised issues that the PRA and FCA need to consider further before the final rules are made, the rules will come into force in two tranches: a limited set of new rules on 7 March 2016, with a second tranche to be issued 'as soon as possible' (probably during summer 2016).  There may be a transitional period before the final rules take effect to allow firms time to implement the changes.

Which roles require a regulatory reference?

For Solvency II firms, regulatory references must be obtained for candidates applying for the following functions or roles:

  • SIMFs - PRA senior insurance management functions
  • SIFs  - FCA insurance controlled functions
  • key function holders within an insurer (KFH)
  • certain non-executive director (NED) roles (notified NEDs) 

What are the new rules on regulatory references?

First tranche (7 March 2016)

The following rules apply to PRA-regulated firms from 7 March 2016:

  • When asked for a reference in respect of any of the above individuals by another authorised firm, firms must provide a reference with ‘all relevant information’ of which they are aware 'as soon as reasonably practicable'.

This requirement already exists but has only applied to Approved Persons.

  • Firms considering the appointment of any such individual:
    • must take reasonable steps to obtain appropriate references going back at least the last 5 years' service, from that individual’s current and previous employers and organisations at which they are/were serving as a NED
    • must ask for information on all matters which that person is aware of that is relevant to the assessment of the individual's fitness and propriety, where the reference is sought from a PRA- or FCA-authorised person
    • The requirement to obtain references going back five years does not appear to apply to KFH at the moment. However, it is expected that this requirement will be introduced for KFH in the final rules.

The FCA will also issue final rules on regulatory references. In the meantime, the current referencing requirements under the Approved Persons regime for pre-approved roles in relevant insurers will continue to apply.

Second tranche (expected Summer 2016)

The second tranche of rules, expected in the summer this year, are not currently available since the regulators are still considering the responses to their October 2015 consultation.  However, it is worth firms bearing in mind the proposals since many of them are likely to be carried through.  In summary they are:

  • References for new posts to be obtained going back six years (even for internal transfers)
  • References to be provided in a standard format or template and comply with certain mandatory disclosure requirements
  • Firms to update references, if information about the individual's conduct or fitness and propriety subsequently comes to light in a period of six years after they are first given
  • References to be obtained before regulatory approval is sought
  • Firms to enhance systems and controls requirements regarding retention of records and procedures for requesting and providing references
  • Records relating to conduct and fitness and propriety to be maintained for six years after an employee leaves the firm

What should employers be doing now?

  • When giving a reference, remember that firms continue to owe a duty, to their former employee and the firm receiving the reference, to exercise due skill and care in the preparation of the reference which must be accurate and based on documented fact.  Firms may give frank and honest views, provided they have taken reasonable care as to the factual content and the opinions expressed, and verifying the information on which they are based. Care should be taken to ensure that the reference does not discriminate against the employee on any protected ground, nor should it refer to any claim or complaint based on alleged discrimination
  • When appointing a candidate to a new role, request appropriate references from former employers going back five years, regardless of whether the past employers are authorised firms
  • As regards current employees, there is generally no need to obtain a new reference if grandfathering into a role, but a reference may be needed the first time an individual takes on a senior manager, KFH or notified NED role
  • Where the individual has lived or worked outside the UK for a material time in the last five years, the firm must obtain the individual's consent to request 'the fullest information' on them that the firm can lawfully request under the equivalent overseas legislation
  • Ensure adequate policies are in place to cater for obtaining references in these circumstances
  • Where the firm outsources the collection of reference information to another (unregulated) third party, make the firm receiving the reference aware that the unregulated third party is acting on behalf of the firm providing the reference.
  • Check standard agreements that they do not limit the firm's ability to disclose relevant information in regulatory references, such as a settlement agreement; make sure staff understand how this severely limits the firm's ability to provide references on "agreed terms"

What does this mean for regulated firms?

The PRA believes that the first tranche of regulatory reference rules will enable firms to obtain information to assist in their assessment of the fitness and propriety of 'in-scope individuals' without a significant increase in costs for these firms. This is probably true for many firms. However, it seems likely that the second tranche of rules will increase the amount of due diligence firms typically carry out before giving a reference, and for those firms, there may be a notable cultural change when the final rules are in force.  

As and when the second tranche of rules are announced, we will give a further update on what firms should be doing to prepare for the new rules. If the controversial requirement to keep references up to date for six years is introduced, firms will have to significantly update their record keeping procedures, bearing in mind the need to balance data protection proportionality requirements against their regulatory obligations.

What key actions should HR take in relation to terminations?

Update policies and template settlement agreements  

  • Update disciplinary and performance management procedures (see our Reg Ready Briefing - week 3)
  • Check the terms of your template settlement agreement to ensure:
    • they do not limit the firm's ability to disclose relevant information in regulatory references 
    • there are no provisions:
      • which require the signatory to state they have not made a protected disclosure or they know of no information that could form the basis of one
      • which prevent or discourage an employee from making a protected disclosure or a "reportable concern"
  • Where the disciplinary procedure is instigated:
    • Ensure that investigations are carried out in good time and that all disciplinary matters and other reportable concerns are properly recorded
    • Consider whether to permit employees to be legally represented at disciplinary hearings;  this is likely to be requested by employees in future
    • Where the allegations concern breach of conduct standards, ensure that those involved in the investigating and disciplining process understand the conduct standards and how they apply across the firm's business

Notify the regulator

  • By completing Form C, or qualified Form C, when an individual ceases to perform controlled functions
  • When there is a known breach of conduct standards by an individual, including any breach which does not come to the firm’s attention until after the person concerned has left the firm
  • When disciplinary action has been taken (this should be a separate notification to the above)
  • When an employment tribunal finds that a whistleblower suffered detriment or was unfairly dismissed as a result of blowing the whistle

Handover certificates

  • Although there is no requirement for insurers to make handover arrangements, firms should consider introducing a policy of completing handover certificates on change of role or departure. This could show how the senior manager has exercised their responsibilities and identify any issues their successor should be made aware of.  An acrimonious departure may result in uncooperative behaviour on the part of the departing employee but it is important to make the senior manager aware of the potential personal regulatory risks involved if handover is not affected properly 
  • Ensure that, before a person begins to perform any new regulated role, they are provided with all relevant information that they might reasonably expect
  • It is also worth considering making any termination payment conditional on a proper handover

Next week we will be covering handling demands from senior managers.

Podcast

We will also be providing a podcast which will be available from 3 March 2016.