UK: Regulatory References | FCA Issues Its Final Rules

Last Updated: 4 November 2016
Article by Daniel Lewsey

On 28 September the Financial Conduct Authority (FCA) released a Policy Statement setting out its final rules on regulatory references under the Senior Managers and Certification Regime (SMCR). The Policy Statement is relevant for deposit-takers, Prudential Regulation Authority (PRA) investment firms, insurers, solvency II insurers and non-directive insurers and will be of particular interest to those individuals who seek regulatory approval to perform a Senior Management Function (SMF); a Significant Insurance Management Function; an FCA controlled function or a Significant Harm Function (SHF).

Implementation deadline

What many firms may be pleased to hear is that the FCA has agreed to extend the implementation date to 7 March 2017, allowing firms an additional five months to update procedures. This date has been purposefully set so that the new referencing requirements coincide with the implementation of the full certification regime and application of conduct rules to "other conduct rules staff". All other FSMA-authorised persons who are not currently subject to the SMCR should note however, that the FCA intends to consider whether to extend the regulatory reference rules to all authorised persons once the full regime has been implemented.

What are the key changes to the existing regime?

The new regime enhances certain elements of the existing referencing regime. Key elements of the final rules are as follows:

  • firms will be required to request / provide references covering an individual's previous six years' employment;
  • firms will only be required to disclose conduct rule breaches that culminated in disciplinary action (e.g. issuing a formal written warning; suspension/dismissal; and reduction or recovery of a person's remuneration);
  • firms must update previously-issued references where misconduct has been identified up to 6 years after an employee has left the firm; and
  • firms will be required to take (and be able to demonstrate they have taken) reasonable steps to obtain a reference, especially in scenarios where a reference is proving, or has proved difficult to obtain.

The new reference regime brings with it an opportunity for firms to focus on their existing recruitment procedures; specifically the level and adequacy of due diligence undertaken on candidates and on any existing procedures to monitor employees' ongoing fitness and propriety. Firms will also need to ensure that where a reference is difficult to obtain, the steps that have been taken to obtain the reference can be construed as reasonable and are clearly documented and recorded. With the FCA's increasing focus on individual accountability firms should expect that regulators will be keen to ensure the SMCR, including the regulatory referencing rules, are being strictly adhered to.

Key questions and answers for firms

Set out below are some key questions that firms may have in relation to the regulatory reference requirements and the FCA's responses from the Policy Statement:

Q. What should firms do to obtain a regulatory reference from a company that is not subject to the SMCR, such as a non-FS firm or an overseas firm?

The FCA expects firms to take all reasonable steps to obtain a reference from an individual's former employer.

Q.  Should firms seek references from former employers when the individual they are looking to recruit was previously a contract/contingent worker?

Yes. Section 60A and s63F of the Financial Services and Markets Act imposes a statutory obligation on firms to ensure relevant staff are fit and proper.

Q. What should a firm do if there are concerns that requesting a regulatory reference will alert an individual's current employer that they intend to leave?

The FCA will allow firms to delay obtaining a reference no later than one month before the end of the application process.

Firms should however note that, where a reference has not been able to be obtained and the FCA asks for this as part of the application process, then the statutory clock for considering the application can be stopped until such time as a reference is received.

Q. What should a firm do if requesting a regulatory reference for a senior employee of a listed firm would potentially trigger a regulatory notification requirement under Listing Rule 9?

The FCA has set out its stance that, in the event the provision of a reference would trigger a notification requirement for a listed firm then there will not be a time limit imposed for the provision of that reference. Firms can obtain a reference at any time during the application process.

Q. Have the regulators defined or provided any guidance around what constitutes the taking of "reasonable steps" to obtain a regulatory reference?

The FCA has not provided a view on what constitutes "reasonable steps"'  It has however helpfully provided guidance to say that regulated firms should be able to provide a regulatory reference within six weeks.

Q. What should firms do if new information comes to light about a former employee that calls into question that individual's fitness and propriety, but they do not know where their former employee now works?

The FCA will expect firms to contact known employers to establish if an individual works for them and if so, to provide that employer with an updated reference.  However, where this information cannot be established firms are not required to provide an update.

Q. What should firms do if they identify that a former employee was involved in serious misconduct; where the misconduct took place more than six years ago; but where the misconduct has come to light during the last six years?

The FCA will expect former employers in this situation to disclose this information to their former employee's current employer, if this is known.  Serious misconduct is defined in SYSC 22.5.10(G) and SYSC 22.5.11(G).

Similarly, if a current employer receives an updated reference about one of its former employees then the FCA will expect that firm to consider whether or not the content of the updated reference impacts on their employee's fitness and propriety.

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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