The Regulatory References Regime in the Financial Services Sector

The regulatory references regime came into force on 7 March 2017. Under the new regime, we can expect references to go from bland documents stating an individual’s job title and dates of employment to warning shots to prospective employers ensuring that historic misconduct is brought to bear. The new regime is designed to prevent the so-called “rolling bad apple” effect: individuals with poor conduct moving from firm to firm. The new rules represent uncharted territory for banks and insurers, who will be left to grapple with the practicalities and potential unintended legal consequences.

The new rules apply to all firms covered by the Senior Manager and Certification Regime (SMCR) and the Senior Insurance Managers Regime (SIMR), namely banks (including branches of foreign banks operating in the UK), certain dual regulated investment firms and insurers. The rules apply to applicants being recruited into regulated roles under the SMCR: individuals taking on senior insurance management; senior management; controlled functions; and/or significant harm functions.

Regulated firms providing references are required to disclose all information considered to be relevant in determining whether a candidate is fit and proper. The reference must include details of any breach of the FCA/PRA Conduct Rules in the previous six years where there has been disciplinary action. This will include: a) formal written warnings; b) suspensions (excluding suspension pending an internal investigation); c) dismissals and; d) any sanction involving a reduction in or recovery of remuneration. The reference, which should be provided in a prescribed form (as set out in Annex 1 to SYSC 22 of the FCA Handbook) within six weeks of the request, should provide a factual description of the breach and its outcome. Notably, instances of serious misconduct committed over six years ago also need to be disclosed.

Former employers that are financial services firms must update references given in the past six years if they become aware of information that would have caused them to draft the reference differently, where that difference is significant in terms of the individual’s fitness and propriety. This will include any misconduct that subsequently comes to light when the individual has left the company.

From a practical perspective, former employers are under a common law duty to the employee and new employer to exercise due skill and care in providing a reference. Providing a true, fair and accurate reference may be particularly difficult in circumstances where an employee resigns during an investigation into alleged misconduct. The rules themselves do not specify that employees should have a right to reply to a regulatory reference, although they do provide that firms should “usually” allow the employee the opportunity to comment on the allegations.

We can expect the new regime to have far-reaching implications for firms and individuals performing regulated functions. Allegations of misconduct in a regulatory reference could cost an applicant a job offer, or result in an individual losing their existing job. It is possible that mere reference to an individual being involved in an investigation (whether or not that investigation was concluded) could call into question that person’s fitness and propriety. As well as the financial consequences, in terms of loss of income, the contents of a reference could cause irreparable reputational harm.