Employment Law Reforms

The Enterprise and Regulatory Reform Act 2013 (which contained the bulk of the recently announced government reforms to employment law) was passed on April 25, 2013, although most of its provisions will not come into effect until later this year or even this time next year. Some of the more contentious provisions, such as mandatory pre-action ACAS conciliation, protected conversations, renaming of compromise agreements and changes to the discrimination legislation, are not set to be effective until October 2013 or April 2014. The whistleblowing changes detailed in the previous newsletter will come into effect in June 2013.

Employee Shareholder Status

The government’s controversial proposals to introduce a new class of employee, the “employee shareholder,” have also finally been enacted, via the Growth and Infrastructure Bill 2013. The House of Lords twice rejected the Bill before it became an Act, and it was only agreed and passed (on April 25, 2013) after significant concessions from the government that will arguably curtail the likelihood of this scheme being used.

In return for a minimum of £2,000 in shares (with any gains made on the first £50,000 of shares being exempt from capital gains tax), an employee shareholder would most notably give up the right to flexible working, unfair dismissal and redundancy pay. However, the concessions won by the House of Lords provide that the employee shareholder must receive up-front advice from an independent lawyer or adviser before accepting the contract (to be paid for by the employer—effectively an up-front compromise agreement) and be entitled to a seven-day cooling off period following that advice. Their offer must also include a statement explaining the rights they are sacrificing and the rights which attach to the shares. Existing employees will be protected from dismissal or detriment if they refuse to accept this new status upon offer. The new status is intended to become effective from September 1, 2013.

UK Regulatory Changes – The New Regime

On April 1, 2013, the final stages of the long-awaited handover of power from the UK financial services regulatory body, the Financial Services Authority (“FSA”) to the “twin-peaks system” of the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA), were completed. The division of responsibility between these new bodies can initially appear confusing, but, broadly, it breaks down as follows, with the FCA being the main body with companies will have day-to-day dealings concerning employment-related issues, as it deals with conduct and listing.

PRA

The first of the new regulators, the PRA, is a branch of the Bank of England that supervises 1,700 banks, insurers and large investment firms in relation to prudential regulation. (In this context prudential regulation means the rules targeting balance sheet risks and instability within large and systemically important financial institutions). Subject to certain regulatory thresholds, the following types of firms are PRA-authorized, as such, are dual-regulated by the PRA for prudential purposes and the FCA for conduct purposes.

  • Banks 
  • Building societies 
  • Credit unions
  • Insurers (including friendly societies) 
  • Lloyd's of London and Lloyd's managing agents
  • Certain systemically important investment firms  

FCA

The second new regulator is the FCA, which as the direct successor of the FSA, will supervise prudential regulation for all financial services firms not covered by the PRA as well as act as the conduct regulator and listing authority.

FPC

A third new body, known as the Financial Prudential Committee (FPC), whose members will include the heads of the FCA and PRA as well as the Governor of the Bank of England, has also been formed. It will have the task of monitoring the health of the financial system as a whole and has powers to force the other regulators to implement policies.

Particular Issues for Employers

There are four key points to note in relation to this new structure in the context of employment law related regulatory issues.

  1. In relation to the approved persons regime, dual-regulated firms will need to consider to which regulatory body to apply for an application for approval to carry out a particular controlled function since both the PRA and FCA are responsible for certain controlled functions depending on their particular remit. 
  2. Firms should be aware of their regulatory obligations to notify the appropriate authority when suspending or terminating approved persons and in relation to providing references in respect of controlled functions.
  3. The FCA is expected to deal with more enforcement cases than the PRA (by virtue of its remit in relation to conduct issues), but both will have their own separate enforcement processes. Therefore, dual-regulated firms should be aware that either or both of these bodies may investigate a particular case and, so, should have policies and procedures on how to manage either a joint or separate investigation. In relation to enforcement of the Remuneration Code, the PRA is expected to be primarily responsible, but the FCA will also have a hand in its application. It therefore remains to be seen how this will be handled in practice.
  4. Regulated firms must consider whether and when to notify the appropriate body of anything relating to that firm of which the regulator would reasonably expect notice. Dual-regulated firms should be aware of the requirement to notify both regulators accordingly.