The new regulatory reference regime came into force on 7 March 2017, ushering in significant changes for how banks, PRA investment firms and insurers approach references for many of their staff. The regime has been developed as part of the new rules for personal accountability in the financial services sector under the Senior Managers and Certification Regime (SMCR) and the Senior Insurance Managers Regime (SIMR).

The new rules aim to ensure identification and prevention of ‘bad apples’ – individuals who move jobs to avoid their conduct history catching up with them.

Below we give an overview of the rules, a flavour for some of the tricky issues they engage and some key pointers for firms likely to be providing or requesting such references.

The regime is wider in scope than appears at first blush because:

  • employers outside of the scope of the SMCR and SIMR may be required to provide references to in-scope firms; and
  • the scope of the SMCR regime (presumably incorporating a similar reference framework) is expected to expand in 2018 to include all insurers, investment firms, asset managers, insurance and mortgage brokers and consumer credit firms.

Applicability

Who needs to obtain a regulatory reference?

  • Regulatory references must be obtained for individuals being recruited to perform the following roles:
    • in SMCR firms:
      • Significant harm functions under the Certification Regime;
      • Senior management functions under the Senior Managers Regime; and
      • Notified non-executive director roles; and
    • in SIMR firms:
      • Key function holders;
      • Senior insurance management functions; and
      • FCA controlled functions and notified non-executive director roles.
  • The new rules apply irrespective of the candidate’s employment status.
  • References should be obtained before the candidate is certified and one month before the end of the application process in the case of candidates for controlled functions.
  • Employers should take reasonable steps to obtain references from overseas firms.

Who needs to provide a regulatory reference?

  • The current employer and any employer of the relevant individual in the past six years are required to provide a regulatory reference.
  • The requirement to provide a reference applies to all employers, not just authorised firms.
  • References do not need to be provided intra-group if records are kept centrally.

Requirements - overview

  • Regulatory references must disclose all information which would be relevant to the assessment of whether an individual is fit and proper, including whether the candidate:
    • has performed any of the roles listed above;
    • has breached any Conduct Rules or required levels of fitness and propriety as determined by the employer; and
    • has had any disciplinary action brought against them.
  • If the answer to any of the above is ‘yes’ then further details have to be provided, including the outcome of any disciplinary action.

Requirements - specifics

Mandatory form

  • SMCR and SIMR firms must give their reference in the form of the mandatory template set out at Annex 1 to SYSC 22 of the FCA Handbook. Non-SMCR/SIMR firms may choose whether or not to use the template.
  • The questions in the template are ‘yes/no’ in format, which means that it is much harder now for firms to sit on the fence or stay silent on conduct-related matters.
  • Firms need to actively confirm whether there is ‘any other information that we reasonably consider to be relevant’.

‘All relevant information’ and ‘serious misconduct’

  • The FCA has declined to provide additional guidance on what ‘all relevant information’ should include but suggests referring to the FCA Handbook and making the decision on a case-by-case basis. Information which has not been verified is not required to be disclosed.
  • ‘Serious misconduct’ which happened more than six years ago should also be disclosed. There is a non-exhaustive list of factors to consider when deciding if misconduct is sufficiently serious to disclose in SYSC 22.5.11 of the FCA Handbook.

Disciplinary action

  • ‘Disciplinary action’ is defined to mean:
    • a formal written warning;
    • suspension or dismissal; and
    • reduction or recovery of any of the person's remuneration due to their breach of a conduct requirement.

Updating references

  • If a firm becomes aware of matters that would have changed a reference they gave within the preceding six years they have an obligation to update the reference. For example, in circumstances where there is a subsequent investigation into historic actions, all references to which these actions relate will have to be updated.

Record keeping

  • As an employer may be required to give a reference for an individual who left six years ago it is important that policies and procedures are put in place for retaining relevant information about former staff members for this period of time.
  • There is no time limit on providing information on ‘serious misconduct’ so firms will need to consider how to identify and retain such information.

Tricky issues/ what to do now

  • Regulated employers giving references under the new regime will need to balance their regulatory duties against their common law duty to exercise due skill and care in the preparation of the reference, particularly given the serious career consequences of negative information disclosed in a reference in the financial services sector.
  • Difficult judgements may be needed in some cases, eg where individuals have been implicated in misconduct but not disciplined for it, or where information about possible wrongdoing comes to light after the individual has left the firm and has not been able to comment on the allegation.
  • The new regime creates potential challenges around firms’ approaches to terminations and settlement agreements, and may necessitate updates to standard employment contracts, disciplinary procedures and record keeping policies.
  • Firms may find it helpful to adopt a policy on regulatory references, to ensure that the key stakeholders (namely HR, Compliance and IT) are coordinating appropriately and approaching the new regime in a consistent manner. Such a policy might be particularly useful in the case of later regulatory investigation or employment litigation.