Changes to regulatory references

In FCA CP15/31 (or PRA CP36/15), the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) set out revised proposals for regulatory references for candidates applying for certain roles covered by the senior managers and accountability requirements (coming into force on 7 March 2016).

  • Specific disclosures must be included in certain employer references.
  • Elements of the proposals will be relevant to all regulated firms as well as businesses outside the financial services sector (which may be requested to provide such references).
  • The requirements mainly apply to a range of posts across firms (banks, building societies, insurers, credit unions and PRA investment firms i.e., Relevant Authorised Persons or “RAPs”), and there are plans to extend this across other authorised firms.

CP 15/31 outlines significant changes to the Senior Management Arrangements, Systems and Controls (SYSC) sourcebook – new SYSC 22, a new regulatory reference template, as well as amendments to the Supervision Manual (SUP 10A.15, 10.C.10 and 10C.16 and SUP 10C annexes and forms).

The majority of proposals set out in CP 15/31 are applicable to RAPs (such as banks, building societies, credit unions and PRA investment firms), insurers and individuals being considered as candidates for leading posts in such firms. These measures are part of the wider package of reforms that address accountability and conduct standards in RAPs and insurers.

  • Firms must request regulatory references, going back six years, from former employers (whether authorised firms or not) for candidates applying for senior management functions (“SMFs”), and significant harm functions under the certification regime in RAPs, along with senior insurance management functions (“SIMFs”) at insurers. The PRA plans to extend this to Key Function Holders, Notified Non-executive Directors and NEDs in credit unions (see below for the definitions)
  • It will be a “prescribed responsibility” for a Senior Manager in RAPs and insurers to ensure their firm complies with regulatory reference rules
  • Regulatory references must include concluded breaches of the conduct requirements ofFCA Conduct Rules (COCON), PRA Conduct Rules or Conduct Standards, and Statements of Principle and Code of Practice for Approved Persons (APER) going back six years
  • Regulatory references and disclosures must be made in a standard format, including a confirmation that there is no relevant information to disclose when relevant – see the templates set out in the proposed new SYSC 22
  • There is a positive obligation to update previous references given in the past six years when a firm becomes aware of matters that would cause them to draft that reference differently if they were drafting it now

The CP also includes proposals that are applicable to all authorised firms:

  • A firm must not enter into any arrangements or agreements that limit their ability to disclose relevant information as part of the regulatory references process or to regulators.
  • Firms must enhance systems and controls relating to the retention of records and the policies and procedures for both requesting and providing regulatory references.

The FCA and PRA will consider applying the requirements that are currently only being applied to RAPs and insurers to all FSMA authorised persons in due course alongside the planned widening of the accountability regime (see HM Treasury announcements in October 2015). Such reforms will be consulted upon as normal at that time.

Posts covered by the requirements

  • Senior management functions (SMFs) under the Senior Managers Regime (SMR)
  • Significant harm functions under the Certification Regime (CR)
  • PRA senior insurance management functions (SIMF) under the Senior Insurance Managers Regime (SIMR)
  • FCA insurance controlled functions
  • Notified non-executive director (notified NED) roles within a RAP or Solvency II firm
  • Non-executive director roles in credit unions
  • Key function holders (KFH) and notified NED roles within an insurer

Points of note

The new elements of the requirements are: (i) the express codification of the requirement for authorised firms to obtain a reference under FCA’s rules; and (ii) the prescriptive format of any such reference (see the outline in SYSC 22). Currently, these are only implicit within appointments process, assessment of fitness and propriety and systems and controls requirements (e.g. in SYSC 5.1). The proposals in CP 15/31 do not affect existing obligations for authorised firms to disclose all relevant information in references (see SUP 10A.15).

Firms may have to request a reference even where they are recruiting an individual from within their own firm, or from another group company, when the individual has employment history at other organisations within the past six years (see SYSC 22.5.6 G and SUP 10C Annex 3D Form E).

Firms may recruit from businesses that are either: (i) not regulated in the UK, or (ii) outside the regulated financial sector. In such cases, firms must still make reasonable efforts to secure a reference as part of their assessment of the fitness and propriety of prospective candidates (in line with proposed requirements in SYSC 22.2.1 R) and guidance in SYSC 22.4).

The former employer may not be familiar with such requests, and authorised firms will need to consider how to encourage the non-authorised business to respond to such a prescriptive request, which is likely to go significantly beyond the usual levels of disclosure an employer would be prepared to provide.

The requirements and guidance in SYSC 22 do not stipulate definitively what a firm should do if a regulatory reference is not forthcoming from a non-authorised firm. A firm may want to consider whether they can continue with employment without a regulatory reference or seek equivalent comfort through some other means, particularly given obligations to vet candidates (see Financial Services and Markets Act 2000 s.60A and prescribed responsibilities in proposed new SYSC 4.7.7 R).

Additionally, the requirement to seek references for employment going back six years may also prove a challenge for non-regulated businesses. Authorised firms may want to consider whether an additional process is needed to cover any such gaps in the six year reference window, for their own systems and controls purposes. While, businesses that are not authorised do not necessarily need to extend their own information retention processes, there will be other, competing obligations to bear in mind (e.g. under data protection legislation personal data should not be kept for longer than is necessary).

Standard practice for preparing employment references is well known and established, however, the regulators pick out a few points of note to inform what employers disclose in their regulatory references. When providing a reference, firms must still take account of (i) their duty under general law to exercise due skill and care in the preparation of the reference, (ii) their knowledge of the candidate, and (iii) the role for which they are being considered. The specific prescriptive disclosures do not replace this obligation and are to be considered as a minimum disclosure level.

The territorial scope of these requirements is wide. As mentioned above, for RAPs and insurers, the new proposals state that it will be a prescribed responsibility (to be allocated to a senior manager) to ensure compliance with the requirements relating to regulatory references. While, prescribed responsibilities do not apply to EEA branches, the proposals to require firms to seek and provide a reference will do under certain circumstances (see SYSC22.1). For incoming branches of EEA and non-EEA firms, the obligations will only apply in relation to an employee performing a function in relation to the UK branch.

This consultation paper follows on from previous consultations (FCA CP14/13, PRA CP14/14,PRA CP26/14 and PRA CP 12/15) and additional points raised in the Fair and Effective Markets Review. The consultation period is truncated (to 7 December 2015) as a result to allow final rules to be ready for the start of the new accountability regime in March 2016.