Financial Services - The Regulatory References Regime
The regulatory references regime (FCA PS16/22 and PRA PS27/16) comes in force on 7 March 2017.
Which firms are in-scope?
Currently, it applies to banks, building societies, credit unions and PRA investment firms (known as relevant authorised persons, ‘RAPs’), the Society of Lloyd’s and Solvency II or large non-directive insurers recruiting candidates to: senior management functions (including insurance management) FCA controlled functions and significant harm functions.
The Regulatory References Regime is part of SMCR changes, sometime referred to as the Accountability Regime, which has been in place for in-scope banks and firms for 1 year on 7 March 2017. It is directly relevant to SM’s who are responsible for references oversight in firms.
SMCR including the References Regime is to be extended to all other authorised firms for implementation in 2018 with the consultation paper expected in Q2 2017, after some delay.
Many firms not yet in-scope are already adjusting policies. 7 March 2017 is also the date for the Conduct Rules being applied to a wider range of employees as well as the deadline for issuing fit and proper certificates under the Certification Regime.
What are the key elements?
The aim is to address the perception that those whose conduct falls short are too often managed out and able to find their way to a new firm passing the problem on. There is seen to be insufficient accountability for these so called ‘rolling bad apples’.
Obtaining a reference - firms must:
- obtain references before regulatory approval or certification
- inform the referee with the nature of the new role
- take reasonable steps to collect regulatory references for regulated roles for the past six years.
Giving a reference - firms must:
- give a reference, usually within 6 weeks
- use the mandatory template provided
- include all information they consider would be relevant to the hiring firm’s fit and proper assessment to provide as complete a picture as possible of the conduct record
- specifically include any breaches of Conduct Rules, issues of dishonesty and details of disciplinary action taken in the last 6 years (longer for serious misconduct)
- exercise due care and skill when providing references to ensure that they are true, accurate and fair and do not give a misleading impression
- exclude facts that are not ‘verified’
- give the employee in question the right to reply consistent with duty of care
- not enter into any settlement that limits their ability to disclose relevant information
- have policies and systems in place for which a senior manager have oversight
- update references where matters arise that would affect any reference given in the past 6 years.
The Banking Standard Board has published some good practice guidance on 28 Feb on putting in place procedures to assess the fitness and propriety of staff under the new Certification Regime. Some of the templates and guidance will assist with giving and receiving regulatory references.
What should firms be doing?
Firms should at least:
- put in place policies, practices and procedures
- enhance systems and control requirements relating to the retention of records and ensure that retention policies are proportionate
- see that their record-keeping and IT processes and systems dovetail to provide a detailed process on how information is gathered, stored, collated, presented
- ensure that the operation of remuneration malus/clawback provisions dovetail with reference updates
- train SMs to be familiar with their duties
- amend contracts to deal with the right to reply and related confidentiality and malus/clawback issues
- amend the approach to settlement of references and template settlement agreements
- update disciplinary procedures.
In addition firms should:
- prepare for a possible increased risk of litigation
- train on the new significance of starting an investigation into disciplinary accusations which will have future reference issues
- improve investigating management
- clarify the overlap between HR, GC, SM and compliance roles
- consider having a separate team handling references to ensure compliance, consistency across the firm and to reduce risk
- maintain a live reference document with supporting records that are kept updated to facilitate the giving of a reference.
What are the potential pitfalls?
There is now increased liability for claims arising from giving a misleading reference from: the regulators, the new firm and the employee. SM’s have increased personal liability for oversight failures. Firms and regulated individuals that do not comply properly will be under regulatory scrutiny. Giving a reference that has the effect of preventing an employee remaining in the sector will increase the volume of claims for career loss.
As well as claims for breach of statutory reference obligations claims could be for negligent misstatement, victimisation, defamation and malicious falsehood. As well as new categories of risk there remain a number of areas of uncertainty. The regulations were delayed as a number of issues had a troubled path to published regulation. Consultation on the extension of the Regime across all regulated firm will include the question of proportionality. Some of the tensions between regulators’ requirements and the firm’s duties to the employee and new firm will not be easy to navigate.
Some vexed questions include:
- What to include in a reference where an employee resigns part way through a disciplinary investigation?
- How to manage the right reply when an employee has already left or is on garden leave?
- What exactly is verified information?
- How do the regulations overlap with the common law obligations in respect of references?
- How to handle confidential information being supplied as part of the reference process?
- How to express a reference that refers to unresolved or ongoing investigations without giving a misleading overall impression?
- How to match what you want to say and not to say to the mandatory template?
- At what point does cooperation with a good leaver over reference content become a breach of the duty not to the fetter regulatory reference obligations?
This article was written by William Granger. For more information please contact William on +44 (0)20 7427 1073 or at firstname.lastname@example.org.
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