FCA and PRA up the ante on regulatory references
The FCA and PRA have announced a consultation in respect of their proposals to introduce a mandatory form of employment reference (known as a "regulatory reference").
This is a further development in the series of reforms introduced by the FCA and PRA with the aim of improving accountability in banks, building societies and PRA investment firms (collectively known as "RAPs") and insurers (see here for our comments on the Senior Managers Regime, and here for our comments on the Certification Regime).
The proposals result from the Fair and Effective Markets Review, which recommended that the FCA and PRA consult on a mandatory form for regulatory references, to help firms prevent the "recycling" of individuals with poor conduct records.
Who will be affected by the proposals?
Candidates applying for roles in a wide range of financial services and insurance firms will be affected by the proposals. It is envisaged that the proposal will apply to (among others):
- Senior management functions under the Senior Managers Regime;
- Significant harm functions under the Certification Regime;
- PRA senior insurance management functions under the Senior Insurance Managers Regime;
- FCA insurance controlled functions;
- Notified non-executive director roles within a Relevant Authorised Person ("RAP": deposit taking and PRA investment firms); and
- Key function holders within an insurer.
What are the main proposals?
The consultation paper puts forward a number of proposals:
- Firms will be required to request regulatory reference going back six years from former employers of candidates for Senior Management Functions or significant harm (certification) functions, and insurers seeking to appoint an individual into a Senior Insurance Management Function (or other controlled function). The scope of this obligation extends to obtaining references, even where the former employer was not itself an authorised firm, and where the individual is being recruited from another area within the same firm or a group company;
- The reference must contain a "strong base of minimum disclosure". This includes mandatory disclosure of any breach of the FCA and/or PRA Conduct Rules, Conduct Standards, and Statements of Principle and Code of Practice for Approved Persons (APER) within the six year period. It is notable that the minimum mandatory disclosures do not replace an overarching obligation on firms to "exercise judgment" in deciding what to include in references;
- Firms will be required to update previous references given in the past six years, where the firm becomes aware of matters that would cause them to draft the reference differently; and
- The proposals will apply to all authorised firms. This includes an obligation on the firms not to enter into arrangements that conflict with the regulatory reference rules.
The proposals are further evidence of the FCA and PRA's aim of shifting regulatory responsibility for the assessment of fitness and propriety onto the institutions that they regulate.
The changes will significantly increase the responsibility on firms to undertake detailed due diligence before giving a reference if they wish to protect themselves from any liability to the future employer, the employee and/or regulatory scrutiny. This is a notable cultural change from the short references that have been typical up to now.
From a practical perspective, the ongoing requirement, not only to provide references if called upon to do so within the six year period, but also to proactively monitor whether references need to be updated in light of information that comes to light, places a heavy burden on firms who will need to consider how best to retain and update records balancing regulatory and data protection compliance whilst balancing the risk of individual employee claims. The terms of any settlement agreement dealing with an agreed form reference will need to be appropriately worded to enable future changes.
Responses to the consultation are due by 7 December 2015.