In practice

Regulatory references - the final rules

The PRA and FCA issued new rules on regulatory references on 28 September 2016 which came into effect on 07 March 2017.

The rules require all authorised firms to revisit their policies and practices in relation to references. Firms which are covered by the Senior Managers & Certification Regime or Senior Insurance Managers Regime will need to consider their policies for giving references as well as the implications for conduct of disciplinary and quasi-disciplinary situations. The new rules are unlikely to satisfy the firms which are concerned about the risk of “rolling bad apples”. Equally, some ambiguity around what firms are required to provide will give rise to uncertainty until industry practice takes shape.

Key points from the rules are:

Affects all authorised firms:

Even those that are not designated as “full scope firms”:

• have specific obligations eg:
  • clarification that a firm must not enter into any arrangement or agreement that limits ability to disclosure relevant information
  • on record retention
  • obligations to respond
  • new obligation to establish and maintain adequate policies and procedures to comply
• might find the guidance useful (FCA), and
• might be subject to the new requirements in full once the regulators extend the SMR (from 2018).

Regulatory references (all authorised firms):

For all authorised firms, regulatory references:

• must be given:
  • as soon as reasonably practicable
  • by any authorised firm
  • who is current employer or former employer within the past 6 years
  • for controlled functions, certification functions, notified NEDs, credit union NEDs and KFH roles
  • if full scope firm indicates purpose of request
• must contain:
  • all information relevant to assessment of F&P, for the past 6 years, or at any time if serious misconduct
  • (taking into account relevant factors which are outstanding liabilities from commission payments, outstanding or upheld complaints, section 5 of Form A, FIT 2 main assessment criteria and persistency of life policies)
• may contain additional material to that mandated, and
• should normally be issued within 6 weeks of the request (or at least that is the FCA’s stated expectation).

Additional obligations apply (full scope firms):

Which firms are full scope firms:

• FCA:
  • RAPs (banks, building societies, credit unions, PRA investment firms)
  • solvency II firms, and
  • large non-directive insurers
• PRA:
  • capital requirements regulation (CRR) firm
  • credit union
  • third country CRR firm in relation to activities in UK
  • UK solvency II firm
  • the society of Lloyds
  • a managing agent
  • a third country branch undertaking (other than a Swiss general insurer)
  • a UK ISPV, and
  • a large non-directive insurer.

Full scope firms must request references in relation to the proposed appointment of:

• controlled functions (ie senior managers and senior insurance managers), certification functions, notified NEDs, credit union NEDs and KFH roles.

When requesting regulatory reference full scope firms:

• must cover current employer and past six years’ of former employers
• if to an authorised firm, should give the receiving firm sufficient information for them to know what rules apply - and therefore do not need to specify what information is required
• if to a person who is not an authorised firm, will normally need to specify what information is wanted
• if to a full scope firm, must request disclosure of information in the form of the regulators’ new template, and
• to any organisation, must request disclosure of all matters that the organisation would reasonably consider to be relevant to the assessment of fitness and propriety.

In a concession to the consultation process, full scope firms do not need to seek formal regulatory references from other group companies if they have access to the same information.

When giving a regulatory reference full scope firms:

must give it in the form of the Template

Content of Template:

• 1-5: basic details, names etc
• A-D: roles
• E: Have we concluded not F&P? Yes or No. If Yes, then provide details
• F: Have we taken disciplinary action for breach of conduct rules, or which relates to not being F&P? Yes or No. If Yes, then provide details.(Disciplinary action being, formal written warning, suspension (but not including investigatory) or dismissal, reduction or recovery of compensation if due to a breach)
• G: Any other information relevant to F&P
• Firms can:
  • change Template as long as it does not affect the above
  • add qualifying information, or
  • use the Template in advance of March 2017.

Duty on full scope firms to update references:

• Duty on full scope firms
• If:
  • becomes aware of something that would have changed a reference or
  • reaches a conclusion re F&P or takes disciplinary action which would have changed the reference
  • and the information is significant for F&P, must update reference given to current employer (if full scope (PRA), FSMA (FCA)) as soon as reasonably practicable. The rules set out a process for firms to establish whether an individual continues to be employed by the firm to which a references.
• Duty lasts for six years after giver of the reference ceases to employ the individual, (and, as an additional limitation, if not serious misconduct, then only matters in the six years before the reference).
• Does not apply to references given pre 07 March 2017.

Further FCA guidance on providing a reference:

• Rules do not require firms to include information which has not been verified.
• Based on the rules as they stand, firms not necessarily required to include in a reference the fact that an employee left whilst disciplinary proceedings were pending or had not started. The FCA states that including such information is likely to imply a cause for concern but a firm may not have established that the ex-employee was actually responsible. However, the firm may include such information if it wishes. However, it is suggested that a firm should were feasible conclude investigate procedures before an employee departs. To avoid allegations of unfairness, firms may wish to develop policies regarding how they will deal with individuals who resign before the conclusion of an investigation.
• References should be as complete a record of an employee’s conduct record as possible.
• A firm owes a general duty to exercise due skill and care when preparing a reference. Reasonable care should be taken over factual content and opinions expressed. A reference should be true, fair and accurate and based on documented fact.
• Fairness will normally require a firm to have given an employee the opportunity to comment on information included in a reference (eg through prior disciplinary proceedings). The requirements of fairness may also involve giving former employees a further opportunity to be heard if a firm proposes to include information regarding a matter which has not been the subject of a concluded disciplinary procedure. Again, firms (particularly full scope firms) may wish to develop a policy for dealing with such situations. If there are gaps in a firm’s records that should be noted in reference.
• Criminal records check information need not be included in a reference - the requesting firm should do its own check.
• Full scope firms may need to ask for a reference to be updated. This might apply where a firm is renewing the certificate of a certified person or an employee is changing jobs within a firm, unless an existing reference is sufficient for the purpose. Detailed guidance is provided.

Timing:

• in force 07 March 2017, and
• transitional provisions apply (eg to exclude the need to obtain a reference where a person is carrying on a certified function or controlled function and continues to perform it).

Practical implications:

• update recruitment procedures to obtain information from individuals on “relevant employers”
• update reference request forms
• update response forms
• introduce procedure for identifying when it might be necessary to update a reference given after 07 March 2017
• update employee handbook/other policies to ensure that staff are aware of the firm’s obligations in relation to regulatory references
• introduce a policy regarding when information regarding an incomplete investigation will be included
• introduce a policy regarding giving employees or former employees a means of responding to a proposed adverse comment in a regulatory reference which has not been the subject of a concluded disciplinary process
• introduce procedure for dealing with an update to a reference previously obtained, and
• update record retention policies.

In order to help organisations understand their obligations and responsibilities under the final rules, Simmons & Simmons has put together three individual guides which deal with the situation as it applies to:

• SMCR firms 
• Non-SMCR firms (FCA-only authorised firms) 
• Non-regulated firms in the financial services sector