On 17 May 2021, the Monetary Authority of Singapore ("MAS") issued a consultation paper inviting public comments on proposals to mandate reference checks not only to representatives of financial institutions ("FIs") but also other employees of FIs as well.
While the practice of conducting reference checks is not new in Singapore, MAS had observed that different FIs had differing standards, and is now proposing to standardize the practice by requiring FIs to perform reference checks and respond to reference check requests in accordance with a standardized regime.
- Preface
In an earlier consultation initiated in July 2018, MAS had proposed to mandate reference checks for representatives of FIs, along changes to misconduct reporting requirements. The term "representative" generally refers to staff of entities licensed under the Securities and Futures Act and/or Financial Advisers Act whose role is to carry on the activities for which the entity is licensed. Apart from such representatives, MAS considered that the conduct of other employees of FIs could also result in a detrimental impact on customers' interests, on an FI's prudential soundness and reputation, and on public confidence and trust in the financial industry. Therefore, MAS is proposing in this present consultation to extend the mandatory reference check requirements beyond representatives to other employees.
- Scope of FIs
MAS is proposing to require the following classes of FIs to conduct reference checks and also respond to reference check requests:
- Banks;
- Credit card and charge card issuers licensed under the Banking Act;
- Merchant banks;
- Finance companies;
- Insurers;
- Foreign insurers operating under foreign insurance schemes established under the Insurance Act;
- Designated financial holding companies under the Monetary Authority of Singapore Act;
- Capital markets services licensees;
- Licensed financial advisers;
- Non-retail exempt financial advisers under regulation 27(1)(d) of the Financial Advisers Regulations;
- Registered insurance brokers;
- Certain classes of capital markets intermediaries exempt from licensing under the Securities and Futures (Licencing and Conduct of Business) Regulations;
- Licensed trust companies;
- Trustees of collective investment schemes approved under the Securities and Futures Act;
- Locally incorporated approved exchanges and recognised market operators;
- Licensed trade repositories;
- Locally incorporated approved clearing houses and recognised clearing houses;
- The Central Depository (Pte) Ltd;
- Approved holding companies under the Securities and Futures Act;
- Authorised benchmark administrators and exempt benchmark administrators;
- Authorised benchmark submitters and designated benchmark submitters;
- Operators and settlement institutions of designated payment systems;
- Standard payment institution licensees and major payment institution licensees; and
- Licensed credit bureaus.
- Employees within the scope of the new Reference Check Rule
There would be several groups of FI employees which will be covered by the proposed reference checks requirements.
The first group would comprise employees who are categorised as representatives of the FI (in accordance with the Securities and Futures Act and/or the Financial Advisers Act). This is the group already covered in the July 2018 MAS consultation paper.
The second group would comprise senior managers. These would be persons employed in an executive capacity by the FI and who are principally responsible for the day-to-day management of the FI.
The third group would be employees who are neither representatives nor senior managers. For this group, MAS is considering and inviting feedback on two alternatives.
Under the first alternative (which aligns with the proposed expanded powers for the issuance of prohibition orders), the reference check requirements would apply to individuals performing any of the following functions within an FI:
- risk-taking functions;
- risk management and control functions;
- performing critical system administration; and
- authorisation or approval of payments (excluding small payments).
Under the second alternative, the reference check requirements would only apply to individuals whose functions within an FI could result in the FI or to customers facing direct financial risks. This slightly narrower alternative would mean that the reference check requirements need not apply to those individuals whose risk roles cover only operational risks, technology risks, legal and regulatory risks. Nor would the requirements apply to those individuals engaged in compliance roles.
- Lookback Period, Minimum Mandatory Information and Right to View
In relation to how far back FIs are expected to look for the purposes of evaluating the individual's references, MAS is proposing a period of 5 years. To keep matters simple, this would be calculated on the basis of calendar years, rather than years of employment. MAS is not proposing to require FIs to go back beyond the immediate past 5 calendar years even if there are gaps in the individual's employment history during this period.
As for the information to be requested or provided as part of the reference checks, MAS is proposing at least the following:
- The individual's employment history, including the duration of employment, the roles and job functions of the individual (including the last position held), and the reason for the cessation of employment;
- Compliance information relating to the individual's fitness and propriety, including any investigations, breaches of legal and regulatory requirements, disciplinary action, or misconduct reports;
- The last four balanced scorecard grades assigned to the individual (where applicable); and
- In relation to individuals working in the insurance sector, the persistency ratio of insurance policies sold by the individual and the methodology used in computing the persistency ratio (where applicable and available).
MAS is also proposing that an FI that receives a reference check request from another FI should respond no later than 21 calendar days from the date of receipt of the reference check request.
Finally, to ensure that information given in response to reference check requests is accurate, objective and balanced, MAS is also proposing that the affected individual should be told that a reference check request has been made and have the opportunity to see the proposed response to the reference check request. Recognising that there could be operational challenges with this, MAS is specifically inviting feedback concerning how such requirements might be implemented.
MAS has also acknowledged that in certain cases, an individual seeking employment may have valid reasons for not wanting a prospective employer to reach out to his existing employer with a reference check request. MAS is therefore not proposing that the FI must make the reference check before making an offer of employment to the individual. In such cases, it would be acceptable for the new FI employer to make an offer of employment ahead of completing the reference check, but such an offer should be conditional upon the FI receiving a satisfactory response to the reference check.
- Cross-sector and Cross-border Application
In the consultation paper, MAS also noted that there may still be gaps within the proposed reference check regime, for instance, where an FI hires an individual from outside of the financial sector or from outside of Singapore, or even from another entity that is not an FI included within the proposed reference check regime. In such cases, MAS has stated that it would be sufficient for the hiring FI to take reasonable steps to make a reference check request, and that it may proceed with the hire if it considers the individual to be suitable, even though the reference check request may not have been adequately responded to.
- Record-keeping of Mandatory Information
Because it is possible for individuals who are presently outside the scope of the proposed reference check regime to be subsequently hired by an FI for a role that is within the scope of the proposed reference check regime, MAS is also proposing to require FIs to generally maintain records of all of its employees and not merely those that have roles that are within the scope of the proposed regime. Such records should be kept for a minimum period of 5 years.
The only exception would be those individuals who have ancillary service roles within the FI (such as drivers, food and beverage personnel, and clerical personnel).
- Investigation and Disciplinary Process
In line with existing MAS risk management guidelines (particularly those relating to internal controls), MAS has also re-emphasised the need for FIs to have policies and procedures for conducting internal investigations and disciplinary proceedings, and to ensure that these are duly observed in all cases, so that individuals are given a fair chance to explain or defend themselves whenever any misconduct or deviation from internal governance rules are encountered.
- Mode of Implementation and Transitional Period
The proposed reference check regime will be implemented through Notices issued under the legislation applicable to each class of FIs to which the regime will apply.
One could expect that MAS will release the proposed Notices for a further round of public consultation once the substantive policy position is settled.
- Closing Date of Consultation
The consultation closes on 25 June 2021 and a copy of the MAS consultation paper may be obtained here.
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.
