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21 Feb 2017

The new Regulatory References regime – what does it mean for you?


On 7 March 2017 new rules come into force in relation to requesting and providing references for employees covered by the Senior Manager and Certification Regime (SMR) and the Senior Insurance Managers Regime (SIMR). The rules will be relevant for all firms regulated by the FCA or PRA, including banks, building societies, insurance firms and brokers.

Why has the new regime been introduced?

The FCA and PRA have both recognised that it is currently too easy for employees with poor conduct records to make frequent moves between different financial institutions without any accountability or any way of properly assessing candidates' suitability. The new rules on references are designed to address this concern.

Who is caught? 

  • Any candidates applying for the following roles will require regulatory references:
    o senior management functions under the SMR and SIMR;
    o significant harm functions under the SMR;
    o significant influence functions under the SIMR; and
    o notified Non-Executive Director roles under the SMR or SIMR
  • A firm seeking to appoint individuals into such roles will be required to request a regulatory reference from all previous employers in the preceding six years, whether or not the past employers are in the financial services sector and even if the past employer is based overseas.
  • All regulated firms are required to provide regulator references within six weeks of receiving a request.

What is a regulatory reference?

  • A regulatory reference must include information looking back six years from the date of the reference – or looking back an unlimited time where there are serious matters to be disclosed or where there has been serious misconduct.
  • What constitutes "serious" for these purposes is not entirely clear, but dishonesty is likely to be key and employers should focus on the relevance of the particular information in assessing the fitness and propriety of the subject of the reference.
  • This places a significant burden on regulated employers to keep adequate records in relation to departing employees for at least six years (and which look back at least six years).
  • Employers who do not have the relevant records from before March 2017 can include a disclaimer to that effect in any reference provided, but employers will need to put in place appropriate systems to ensure that relevant information is retained for the appropriate period with effect from that date.
  • Regulatory references will need to be provided using a mandatory template that has been produced by the FCA.

What is the obligation to update references? 

  • If a firm identifies information that would have changed any information included in a regulatory reference, it will be required to update the reference given. For example, where an internal investigation gives rise to concerns about a former employee's conduct, the employer will need to consider whether it is necessary to update any reference provided.
  • This obligation is fairly wide-ranging – where new information comes to light, employers are required to made reasonable enquiries as to the identity of an individual's current employer, even if that employee has moved to a new employer since the original reference was given. Employers may need to go as far as checking business networking sites such as LinkedIn to establish where a former employee works in order to comply fully with the updating obligations.
  • Regulatory references should focus on regulatory issues and confirmed misconduct. This may mean that employees under investigation seek to resign before formal findings are made against them. However, employers should bear in mind that if they have reasonable grounds to believe misconduct took place, it should be included in a regulatory reference even where no formal finding has been made.

Can employers contract out of the obligation?

  • No. The new rules expressly override any agreement entered into between an employer and employee on termination of employment.
  • There is a specific obligation on firms not to enter into any arrangement or agreement that could conflict with their disclosure obligations under the regime.
  • Any reference agreed as part of a settlement agreement should be made expressly subject to the employer's regulatory obligations.

Can employees bring claims based on a regulatory reference?

  • Yes. The usual considerations apply in relation to an employer's duty to exercise due skill and care in the preparation of a reference and former employees may be able to bring claims where an unjustified bad reference prevents them from getting a new job.
  • As with any reference, a future employer could also bring a damages claim in relation to an inaccurate or misleading reference.
  • FCA guidance suggests that if misconduct is considered uncharacteristic of the employee with an otherwise exemplary record, this information should be included in the reference. Although this is not binding, doing so will reduce the risk of challenge.

What should you be doing now? 

  • Put adequate systems in place to ensure that relevant records are retained for the appropriate periods and update Data Protection policies where appropriate. 
  • Consider producing a policy setting out your approach to requesting and receiving regulatory references.
  • Ensure that key staff, particularly those involved in the reference process such as HR, compliance and senior managers, are properly briefed about the new regime, the firm's approach to the giving and receiving of references and their individual obligations. In particular, ensure that everyone is aware that references should not be given informally or without following the proper procedures.
  • Consider early on in disciplinary proceedings whether the allegations involved go to an employee's fitness and propriety. If they do, a Compliance Officer or a Senior Manager should be involved in the process to ensure fitness and propriety is adequately dealt with and in order to ensure compliance with the regulatory reference regime.