UK: UPDATE: Final Rules On Regulatory References Published

Last Updated: 12 October 2016
Article by Chris Holme

Most Read Contributor in UK, September 2017

Firms have been waiting for the PRA and FCA to publish their final rules on regulatory references. The regulators see references as a key tool to allow firms to share information on individuals to support their assessment of potential new recruits as fit and proper. For banks (deposit takers and investment firms) and insurers, here's an outline of what you need to know:

When?

  • The new referencing scheme will come into force on 7 March 2017, to coincide with the implementation of the Certification Regime and application of the Conduct Rules more broadly.

Which areas of financial services will be affected?

  • The rules on regulatory references will apply to banks (deposit takers and investment firms) and insurers, although the FCA is considering whether to extend these regulatory reference rules to other FCA regulated firms but a decision on this has not yet been made.

Which roles to the rules apply to?

  • Relevant regulated firms will need to seek regulatory references for candidates being recruited into Senior Management Functions, FCA controlled functions, Certification Functions, Senior Insurance Management Functions and other Key Function Holders for insurers, and notified non-executive directors (NEDs).

Which employers should firms seek references from?

  • Relevant regulated firms will need to seek references covering the last six years of employment from all former employers at which the individual performed a relevant function, irrespective of the firm type or their regulated status.
  • Firms must take reasonable steps to obtain references from overseas employers.

Timing:

  • Regulated firms providing a reference should do so as soon as reasonably practicable - with the FCA suggesting this would be within six weeks.
  • Ideally, references should be obtained before an application for approval is submitted. However, the regulators recognise that there will inevitably be circumstances where this may not be possible. In these circumstances, references may be obtained no later than one month before the end of the application process. Where a reference also requires there to be a public announcement (such as where the current employer is listed), there is no time limit and references can be obtained at any time during the application process.

Format

  • Regulated firms are required to give a reference using the prescribed template. The template should be referred to or attached to any request for a reference.
  • Unregulated firms who give a reference are not bound to use the template and are likely to give general employment references.

What information must be disclosed?

  • The reference must include individual conduct breaches only where disciplinary action has been taken leading to: a formal written warning; suspension (but not a suspension pending an internal investigation) or dismissal; or reduction or recovery of any of the person's remuneration due to a breach of a conduct requirement. A reference should provide a factual description of the breach (including dates) and its outcome.
  • All other information that is relevant to whether the candidate is fit and proper should also be included in the reference.This could include any information about mitigating circumstances. It might also include events that did not culminate in formal disciplinary action provided the employer has reasonable grounds for believing the misconduct took place.
  • However, the regulators would not normally expect the disclosures to include either commercially sensitive information or details of an employee's responsibilities in addition to their role.
  • The employer must remember it is under a duty to the employee and the new employer to exercise due skill and care in providing the reference. The regulators advise that fairness normally requires a firm to give an employee an opportunity to comment on information in a reference.
  • The obligation to give a reference is irrespective of any terms of any agreement reached with the individual on termination of employment, including a COT3 or Settlement Agreement.

Internal transfers

  • Where a firm is recruiting an individual from their own firm or from another group company, no full regulatory reference is required provided the recruiting firm has access to all the information it needs to assess fitness and propriety (for example, by accessing centralised records).

Updating references during employment:

  • The intention is not to create 'chains' of references:
    • Firms need only update the current employer
    • The updating requirement now applies to :
      • any notice period served between providing a reference and the individual leaving a firm
      • for ex-employers, six years from the date the individual's employment with the firm terminated.
  • The test for whether the reference needs to be updated is whether the new information that has come to light would have caused the firm providing the reference to have written the original reference that they provided differently, had that information been known at the time, and the difference is significant for an assessment of the fitness and propriety of the individual.
  • Misconduct that occurred more than six years ago but which came to light within six years from the date the individual left the firm may require disclosure if that misconduct is serious.
  • When a firm receives updated information, they should take account of the new information as part of the ongoing obligation to assess fitness and propriety.

Transitional provisions

  • Where firms are assessing fitness and propriety of individuals for the purpose of issuing a certificate to perform a certification function before 7 March 2017, no regulatory reference is needed if the individual is in that certified role immediately before that date.
  • If an application for approval as an approved person is made before 7 March 2017, there is no obligation to request a regulatory reference under the new rules, although the firm still remains obliged to request a reference under the current rules.

Changes in record-keeping requirements

  • Record-keeping requirements for banks and insurers is limited to six years retention of disciplinary and fitness and properness findings
  • A firm will not be in breach of the regulatory reference requirements if the reference does not include something for which the firm is not required to keep records.

Contact us if you would like more information on how to prepare for the implementation in March 2017.

For the template references please see:

PRA Policy Statement on Regulatory References.

FCA Policy Statement on Regulatory References.

UPDATE: Final Rules On Regulatory References Published

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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