Australia: Reference Checking In The Financial Services Industry

Key Point

  • Clayton Utz has assisted ASIC and a financial services industry panel to develop a handbook to promote reference checking in the financial services industry.

Section 912A(1) of the Corporations Act 2001 sets out a list of obligations that must be met by all financial services licensees. Paragraphs (a) and (ca) require a licensee to:

  • do all things necessary to ensure that financial services are provided efficiently, honestly and fairly; and
  • take reasonable steps to ensure that the licensee's representatives comply with the financial services laws.

An important first step for a licensee towards meeting these obligations is the screening of candidates to ensure that they are suitable for employment. Reference checking is an important part of pre-employment screening, and in order to facilitate reference checking in the financial services industry, the Australian Securities and Investments Commission ("ASIC") and a panel of industry representatives have developed a handbook, Reference Checking in the Financial Services Industry.

The handbook is published by Standards Australia and builds on the Australian Standard AS 4811-2006 Employment Screening, the national standard on reference checking. It sets out a number of practical measures organisations in the financial services industry can take before engaging individuals.

Clayton Utz provided advice to ASIC regarding legal issues to ensure that the handbook complies with employment laws and the Privacy Act 1988, and drafted the standard forms to be utilised in the reference checking process.

The Problem

Candidates may be reluctant to invite contact with a past employer, or a current employer they have not told they are looking to leave, and past employers may also be reluctant to share information.

In light of this, the information that is available to a prospective employer may be limited, for example, to what is available from regulators, such as information on ASIC's Banned and Disqualified Persons Register. The problem is that there is a range of other individuals, the so-called "bad apples", whose conduct is not as immediately obvious. Bad apples are a concern for the organisation, the industry and the regulator.

Consider the example of the adviser who gives advice that takes no account of a consumer's circumstances or is biased so as to secure improper commission income, and then quietly leaves the organisation before anyone is the wiser. Or perhaps the organisation finds out, makes the changes necessary to protect the consumer's interests and then quietly eases out the adviser from the business on signing a deed agreeing not to tell anyone about it.

The "Bad Apples" project is an attempt, by industry and the regulator, to identify "bad apples" before they pose a further risk to consumers or damage an organisation's business and brand.

Legal Issues And Risks

Not performing reference checks at all may pose risks to a business, including getting the wrong person for the job and the damage they could do to a business, its reputation or consumers. Unless it is managed carefully, however, reference checking may also give rise to a range of legal risks and claims for a prospective, current or past employer or principal.

The usual risks may include negligent misstatement, defamation and representation claims. Depending on the circumstances, other claims may include discrimination, unfair, unlawful or wrongful dismissal, victimisation, interference with contract, whistleblower protection (if applicable), and potentially the expansion of the common law in Australia to recognise damage to future employment prospects.

Once an organisation provides an assessment of a person's work, it has no control over how that information is used, and so may have difficulties controlling the risk of defamation. In the past, employers have often adopted a policy of "say nothing" to help combat that risk.

The handbook sets out a guide for minimising the risks of reference checking in the financial services industry. It aims to encourage current, past and prospective employers and principals to share relevant, factual information about workers, and at the same time, to balance and manage these risks. In the process, it seeks to change industry practice.

The Proposed Solution - Encouraging Cultural Change

The range of measures in the handbook for the sharing of relevant factual information reflect best practice in reference checking. Organisations that embrace that framework inform job applicants about the reference checking process fairly and transparently and ask job applicants to sign:

  • a consent to contact past employers and principals (and if a candidate wants that protection, a request to defer contact with the current employer until the end of the process); and
  • a direction that can be sent to each current or past employer or principal.

The direction is the centrepiece and a significant development. It:

  • directs each current or past employer or principal to provide limited and relevant factual information about the person's work history to all future employers or principals
  • gives each current or past employer or principal a release for disclosing that limited information in good faith; and
  • releases those organisations from all confidentiality obligations that may limit disclosure (such as in a deed of release signed on departure).

There are a number of protections built into the direction that are worthy of mention.

Designed to encourage past employers to share information with prospective employers, the framework is based on not only an individual's consent (which employers may readily ignore) but also an individual's direction to share information about them. It also sanctions disclosure of information otherwise protected by a confidentiality deal.

To encourage individuals to direct that disclosure, the direction is limited to relevant factual information about their work history or performance, and disclosure must be in good faith.

If an individual does not give the direction, or if they refuse their consent to contact previous workplaces, the prospective employer or principal can discuss that refusal with them and draw its own conclusions, in the course of a fair and transparent process.

Industry Take Up

The success of the framework set out in the handbook will ultimately depend on industry take-up. The widespread use of these measures could engender the significant cultural shift needed for employers to share pertinent work information about job applicants in the industry. The handbook therefore creates the potential to minimise the risks of reference-checking, reduce the movement of bad apples and if so, to create additional protections for business and consumers alike.

Of course, without widespread industry take-up, it cannot achieve that aim. Even then, however, it could still provide a useful blueprint for effective reference checking for any business interested in managing its risks, in the financial services industry or beyond. An organisation should, of course, obtain its own advice before implementing such measures.

Industry Feedback To Date

Initial feedback from industry groups has been positive, welcoming the balanced approach reflected in the handbook, including the direction and release.

Greg Tanzer, the then Regional Commissioner, Queensland and Executive Director, Consumer Protection said:

"ASIC would like to thank the industry panel that helped us develop the handbook, including representatives from —
  • Investment and Financial Services Association ("IFSA")
  • National Insurance Brokers Association of Australia ("NIBA")
  • Securities and Derivatives Industry Association ("SDIA")
  • Financial Planning Association of Australia ("FPA")
  • Australasian Compliance Institute ("ACI")
  • Association of Financial Advisers ("AFA")
  • Australian Human Resources Institute ("AHRI").
It's also pleasing to see the practical steps that the industry is taking to promote good reference checking practice. For example:
NIBA and SDIA are passing rules of conduct to require members to conduct appropriate reference checking, including provision of relevant factual information to prospective employers.
The FPA is planning to adopt the handbook into the FPA's enforceable practice standards regime and providing practical web-based tools to members to help reference checking.
IFSA is developing a guidance note for its members in support of the handbook's reference checking process."

Clayton Utz is proud of its direct involvement in the development of these proposals, and gratified to see how industry has taken them on board to date.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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