Regulatory references have been introduced to help prevent the much-criticised “recycling” of employees with poor conduct records between regulated firms. It is intended that these references will enable employers to make more informed and accurate recruitment decisions on the fitness and propriety of candidates for senior roles and other key functions.
Which firms are affected by the new rules?
From March 2017 the new rules will apply directly to the following (collectively referred to in this briefing as "banks"):
- Building societies.
- Credit unions.
- PRA-designated investment firms.
They will also apply to the following (collectively referred to as "insurers"):
- Insurance and re-insurance firms within the scope of Solvency II.
- Other large non-Directive firms.
However, the new regime will be relevant to all firms across the financial services sector as regulated firms will have to be ready to comply with the requirement to provide an enhanced level of information about former employees if receiving a request for a regulatory reference.
Who needs a regulatory reference?
Candidates applying for any of following functions may require a regulatory reference:
- Senior Management Functions.
- Significant Harm Functions under the Certification Regime.
- Senior Insurance Management Functions.
- FCA-approved Significant Influence Functions within insurers.
- Key Function Holders within insurers.
- Certain non-executive director roles.
Financial services firms currently outside the full scope of the regime will also watch developments with interest as the FCA has made clear its intention to extend this regime to other firms in the sector in 2018.
What do banks and insurers need to do?
Banks and insurers will be subject to four key obligations:
1. Take reasonable steps to obtain references
Banks and insurers must take reasonable steps to obtain references from all previous employers in the last 6 years. The regulators have not defined “reasonable steps”, but regulator guidance sets out that regulated firms required to provide a reference are expected to be able to do so within 6 weeks of receipt of a request.
References should be obtained before an application for approval is submitted. If this is not possible, references must be obtained no later than one month before the end of the application process.
Firms within a group do not need to request a reference from each other where the group has centralised records or alternative means of sharing relevant information as part of the assessment of candidates' fitness and propriety.
2. Provide references and disclose mandatory information
The regulators have provided a standard template for the reference with the aim of ensuring a consistent approach. Firms are also required to disclose the following mandatory information:
- Details of all roles held, including a summary of responsibilities.
- Breaches of an individual conduct requirement in the past six years.
- Any findings that the individual was not fit and proper in the six years prior to the request for a regulatory reference.
- Any disciplinary action associated with conduct or fitness and propriety taken in the six years preceding the request for a regulatory reference or between the date of the request for a regulatory reference and the date the reference is given. Disciplinary action includes issuing a formal written warning or dismissal of a person or reduction or recovery of any of the person’s remuneration if imposed due to a breach of an individual conduct requirement. Suspensions imposed pending an internal investigation do not constitute disciplinary action.
- Where a firm has no breaches or findings to report, this must be expressly stated in the reference.
Firms are free to make changes to the format of the standard template where necessary, so long as it does not affect what has to be disclosed under the rules.
Firms must not enter into any arrangements or agreements that limit their ability to disclose the above information. This may represent a change in approach for some firms who might previously have agreed a neutral short-form reference as part of a settlement agreement.
3. Update references when new information comes to light
Firms are obliged to update any references given to authorised firms after March 2017 if new information comes to light during the period between providing a reference and when the individual leaves a firm or, for ex-employees, six years from the date the individual left the firm, which would change the reference they previously provided.
Difficult issues will arise where a firm uncovers misconduct after an employee has left which might lead to a change to the reference previously provided. The FCA has declined to give any guidance on whether employees should have a right of reply in such circumstances, arguing that this is a matter for employment lawyers.
4. Establish, implement and maintain policies and procedures that are adequate for the purposes of complying with the new regulatory references obligations
Banks and insurers will be under a specific obligation to retain disciplinary and fitness and propriety findings for six years in order to comply with the new regime.
Requirements for all firms
Although the new regulatory reference regime applies principally to banks and insurers, all regulated firms are subject to the requirement to disclose all information relevant to an individual’s fitness and propriety on receipt of a request for a reference for a candidate for an approved role.
As well as introducing the regulatory reference regime, the FCA has clarified existing rules and attempted to bring them in line with the new regulatory reference regime. In summary, the amended rules do the following:
- Limit the requirement to disclose “all relevant information” to the same time limit as required for the mandatory disclosures, which is six years from the date of the reference request. There is no guidance on what “all relevant information” means – firms will need to apply judgement on a case-by-case basis. However, firms will not be required to disclose information that has not been properly verified, nor should they do so.
- Clarify that there is no time limit for disclosing "serious misconduct" in a reference, such as a serious breach of rules, misconduct that resulted in enforcement action by the regulators against the firm or misconduct that involved serious dishonesty.
What do you need to do next?
Banks and insurers will need to ensure that they are ready to implement the new regulatory reference rules on 7 March 2017.
All firms will need to review existing procedures and recording-keeping practices to bring them into line with the more onerous requirements of the new regime. There will also be an important training requirement to ensure that all staff are aware of the new obligations.
Firms will also need to review standard settlement agreement wording to ensure that they retain the power to amend and update agreed form references.