New Regulatory Reference Regime
New FCA and PRA rules relating to “regulatory references” which form part of the senior managers regime and senior insurance managers regime (aimed at improving accountability in the financial services sector) come into force on 7 March 2017. Banks and insurers will have to comply with the regulatory reference rules for all candidates being recruited to various senior management functions.
Relevant firms will need to request references from former employers of applicants for relevant roles, covering the applicant’s employment in the preceding six years (or, for any “serious misconduct,” for an unlimited time period).
The FCA and PRA have produced a mandatory template which firms will be required to use when responding to regulatory reference requests to ensure the consistency of disclosures. In addition to details of the role and certification function or controlled function performed by the candidate, the following information must be provided:
> Whether or not the employer has concluded that the candidate was in breach of any of the conduct rules in the six years prior to the request and, if so, the facts on which the conclusion is based.
> Whether or not the employer has concluded that the candidate was not fit and proper to perform a function in the six years prior to the request and the facts which led to this conclusion.
> Details of the basis and outcome of disciplinary action taken as a result of either of the above (including details such as whether any formal warnings were issued or any adjustment made to remuneration).
Obligation to update references
There will also be a continuing obligation on relevant firms to update or revise references given in the previous six years where the firm becomes aware of matters that, if known at the time, would have resulted in a different reference. In practice, this is likely to be relevant only where misconduct comes to light after an employee has left the firm, and the firm concludes that misconduct and a breach of the relevant rules or standards has occurred.
Firms only need to update the individual’s current employer. Therefore, the updating firm must enquire whether the firms to which it has provided a reference in the last six years still employ the individual concerned (and firms that receive such request are required to respond). When a firm receives an updated reference, they should take account of the new information as part of their ongoing obligation to assess the fitness and propriety of their regulated employees.
The regulatory reference regime includes a prohibition on firms entering into arrangements that conflict with the regime. Agreed reference wording included as part of a settlement will be caught by this rule. Therefore, any agreed reference wording should include any disclosures the firm is required to make and reserve a right to deviate from the agreed wording where necessary for the firm to comply with its obligation to provide the disclosures required.
Actions for employers
Firms will be required to establish and maintain adequate policies and procedures to comply with the regulatory reference requirements, in particular, relevant firms should consider:
> Revising their record retention policies in the light of the requirement that all authorised firms retain records of ex-employees’ conduct and fit and proper status for a period of six years following termination of their employment;
> Implementing a system to record references issued in light of the updating requirements;
> Updating disciplinary policies to ensure that it is clear that records relating to expired disciplinary warnings will be retained and not disposed of at the point the warning expires;
> Ensuring that the relevant senior manager is involved with reference requests and checks each candidate’s file prior to job offers being finalised (as responsibility will lie with the senior management function).
Rebecca Thornley-Gibson, Katy Carr