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Regulatory References: new proposals for March 2016

Background

On 6 October 2015, the FCA and PRA published a joint consultation paper setting out proposals in relation to the seeking of and the provision of references for certain regulated roles.  The consultation closes on 7 December 2015 and final rules are then due to be published in early 2016.

As things stand, the proposals are scheduled to come into force from 7 March 2016 and will (a) clarify the existing requirements for all regulated firms and (b) introduce additional requirements for banks and/or insurers in relation to roles carrying with them 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 or FCA insurance controlled functions.   The additional requirements also apply to notified non-executive director roles, credit union non-executive directors and key function holders within an insurer.  I have referred to the roles covered by the additional requirements as “Specified Roles” in the remainder of this blog.

Current position

Before I examine the key aspects of the new proposals, it is briefly worth summarising the current position.  

Whilst regulated firms are not currently required to seek out references, SUP10A.15.1R in the FCA Handbook states that, where a regulated firm has asked another regulated firm to provide a reference and the request relates to a role carrying with it controlled functions, the firm asked must provide a  reference “as soon as reasonably practicable, giv[ing] all relevant information of which it is aware”.   In terms of “relevant information”, the provider of the reference must then have regard to the purpose of the request and, for example, the type of information a firm would normally provide within section 5 of a form A (e.g. details of criminal investigations etc, disciplinary proceedings, judgments for debts etc).

SUP10A.15.4G (which is guidance rather than a strict rule) then states that the requirements within SUP10A.15.1R apply, notwithstanding any clause within a settlement agreement or COT3 agreement which seeks to fetter an employer’s ability to provide a full reference.  The guidance also states that firms should not enter into any arrangements or agreements which conflict with the requirements under SUP10A.15.1.

The new proposals

The new proposals clarify that all FCA/PRA regulated firms must disclose information relevant to “fitness and propriety” when asked to provide a regulatory reference.  The proposals also confirm the ban on entering into agreements which will limit a firm’s ability to disclose information in a reference.

As stated above, the proposals then contain a number of additional requirements for banks and/or insurers where a reference request relates to a Specified Role.  These include the following:

  • banks/insurers recruiting to Specific Roles will need to take “reasonable steps” to collect references going back 6 years (for example, requests will need to be made of more than one employer, if a candidate has worked for more than one employer during those 6 years, and requests will also need to be made of non-authorised employers should they have employed the candidate during the 6 year period);
  • where an employee is making an internal move into a Specified Role on or after 7 March 2016, the employing bank/insurer will still need to seek references;
  • firms receiving reference requests in relation to a Specified Role will need to reply using a mandatory template (see Appendix 4 of the consultation paper);
  • in completing the mandatory form, firms will not be allowed to leave sections blank;
  • recipient firms will have to include details of employer determined breaches of conduct rules and disciplinary sanctions (e.g. formal warnings, suspensions (where part of a disciplinary sanction, dismissals, the claw back of incentive awards for disciplinary reasons etc) going back 6 years.   In doing so, recipient firms can, but are not required to, include details of undetermined allegations;
  • recipient firms will, for 6 years after giving a reference, be expected to provide updates if they become aware of any significant issue going to an individual’s fitness and propriety.

Next steps

Firms caught be any of the above changes should therefore be starting to think about making appropriate changes to their reference procedures, as well as necessary changes to any reference provisions within their standard settlement agreement templates.   In addition, they should also be considering whether changes are needed to current record keeping protocols, so that they are in a position to provide information going back the requisite 6 years, where a reference request is received in relation to a Specified Role for one of its employees.

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