The Senior Managers Regime comes into force on 7 March 2016. One element of the Senior Managers Regime is regulatory references, as recommended by The Fair and Effective Markets Review (FEMR) to “help firms prevent the ‘recycling’ of individuals with poor conduct records between firms”.
This article sets out the current rules relating to regulatory references made by the PRA and FCA, which will apply from 7 March 2016.
What did the regulators originally want?
In October 2015, the PRA and FCA jointly consulted on proposals for the provision of regulatory references. The proposals were for regulatory references from employers in the previous six years, to include all known breaches of Conduct Rules, in a standardised format, and including a requirement for RAPs and insurers to update previous references if new matters came to light.
Responses to the consultation raised a number of issues, especially in relation to the proposal for mandatory updating of references, and the PRA and FCA have both decided to delay the full implementation of the regulatory references regime so that these issues can be considered in more depth.
Instead, the PRA and FCA have made interim rules which will apply from commencement of the Senior Managers Regime. The FCA published FCA PS 16/3 on 4 February setting out the FCA interim rules, and the PRA and FCA jointly published a policy statement (PS 5/16) on 15 February amending the relevant sections of the PRA Rulebook.
What has the FCA introduced?
For the time being, the FCA has made interim rules which apply from commencement – these apply the existing reference requirements to relevant authorised persons (see new SUP 10C.16).
The new FCA rules, which will take effect from 7 March 2016, state that that firms are required to provide information on request to a firm which is considering appointing a person to perform any FCA controlled function. However, the FCA rules do not provide an equivalent requirement for the appointment of individuals who will be carrying out a specified significant harm function.
Therefore, as far as the FCA is concerned, from commencement, these ‘regulatory references’ will have to be provided for senior manager roles, but not for certification employee roles. As stated by the FCA:
“under the SM&CR, a portion of individuals will no longer be performing a controlled function, and will instead be performing a Significant Harm Function under the [Certification Regime]. We have not extended the interim measure to candidates of these roles.”
The FCA also made guidance which states that the requirement to give all known relevant information to the requesting firm also applies in a situation where the requesting firm has outsourced the information collection to a third party – even if that third party is unregulated.
What has the PRA introduced?
The PRA has issued a “first tranche” of rules which will apply from 7 March 2016. These rules combine some of the current rules on the provision of regulatory references in SUP 10B of the PRA Handbook, and transfer these to the new PRA Rulebook.
PRA requirement to provide a reference
The “first tranche” PRA rules state that all PRA-authorised persons are required to provide a reference to another regulated firm “as soon as reasonably practical” on receipt of a request. The reference should contain “all relevant information” of which the disclosing firm is aware.
A PRA-authorised person is dual-regulated by the PRA (for prudential purposes) and the FCA (for conduct purposes); this category of firms includes banks, insurers and systemically important investment firms. Accordingly the PRA have imposed identical requirements in each of the relevant sections of the PRA Rulebook, so that the requirements apply to Solvency II firms, Large Non-Solvency II firms, Non-Solvency II firms, CRR firms and non CRR firms.
It is noteworthy that the PRA rules relating to regulatory references apply in relation to issuing certificates to certified staff, as well as to senior managers – this is a point of difference with the FCA rules. In fact, the regulatory reference requirement will apply if the firm making the request for the reference is considering:
- making a senior management application; and
- issuing a certificate;
- appointing a senior insurance management function holder;
- appointing a key function holder;
- appointing a non-executive director (including a notified NED or a credit union NED);
PRA requirement to seek references
Furthermore, when considering appointing individual to one of the above roles, PRA-authorised persons will be required to take reasonable steps to obtain appropriate references covering (at least) the last 5 years of service from the person’s current and previous employers, as well as organisations at which the person was (or is) a NED.
How does this sit with employment law?
The PRA have said that it is intended that the obligations to supply information in a regulatory reference should apply notwithstanding any agreement or arrangements entered into by a firm on termination: firms are expected to refrain from entering into arrangements which could conflict with their obligations to provide regulatory references.
This PRA statement mirrors the guidance given in the new rules made by the FCA in PS 16/3 which state that the obligation to supply information to: (i) the FCA; or (ii) a firm requesting a reference applies irrespective of any agreement or arrangements entered into between a firm and employee on termination.
Generally speaking, there is no obligation on employers to give or seek references – but this is clearly not an option in the regulated financial services sector. However, the requirement to seek or provide a reference must be undertaken in accordance with employment law principles. Under these principles, the employer has obligations to both the former employee and the new employer.
An employer has to take reasonable care when putting together a reference to ensure that it does not give a misleading impression of the employee. That is not to say that the reference has to be excessively detailed or comprehensive, but should contain information which is accurate, relevant and balanced. When putting together the reference the employer should take care to ensure that opinions or comments about the former employee are supported by evidence and facts which have been properly investigated. This can prove tricky however, if an employee leaves employment before any issues are discovered or part-way through an investigation or disciplinary process such that no conclusions can be reached. In such circumstances, while each case will depend on its own facts, regulatory requirements and obligations to the new employer would require the fact of the issue or the process to be disclosed, obligations to the former employee would require the fact that a full investigation had not been carried out or that no conclusions had been reached should be made clear. It is possible that, in the future, given the potential negative impact even such a purely factual statement such as this can have, employers may be expected to give former employees the opportunity to participate in an investigation process.
Employers should also bear in mind the right of access their former employees have to see a reference as part of a subject access request under the Data Protection Act 1998. While the employer who gives the reference does not have to disclose it, the recipient of the reference could well be required to disclose it (subject to ensuring the data protection rights of the reference giver).
Content of references
The requirement set out in FCA and PRA rules is to provide “all relevant information” of which the firm giving the reference is aware. The FCA rules explicitly require the firm to have regard to the purpose of the request (i.e. to assess fitness and propriety) and set out a list of matters which should be considered: this cross-refers to the FCA criteria for assessing fitness and propriety, set out in FIT 2.
Given this broad requirement, and the absence of any template reference, it is not possible to set out definitively matters that are and are not required to be included, however, it appears likely that (among other matters), the following matters would normally need to be included in the reference:
- any relevant outstanding or upheld complaints;
- any matters relevant to assessing honesty, integrity and reputation, including: criminal offences, breaches of conduct rules, disciplinary proceedings, regulatory investigations;
- any matters relevant to assessing competence and capability, including: whether the person maintained any required professional status and fulfilled training requirements; and
- any matters relevant to assessing financial soundness, including bankruptcies or adverse civil proceedings.
We would hope that the regulators would publish further guidance, including examples of good practice in due course.
The PRA and FCA have both confirmed that firms owe a duty to their former employee, and to the recipient firm to exercise due skill and care in the preparation of the reference. The reference should be accurate and based on documented fact. Although the regulators say that a firm may give “frank and honest” views, the firm must take reasonable care as to (1) factual content; and (2) the opinions expressed, and must verify the information upon which they are based.
When the FCA made its rules, it set out these requirements in guidance. As this guidance applies to all relevant authorised persons, the guidance applies for both regulators, and in respect of all types of regulated firms. Therefore, although the above confirmation is made, it has not been set out in PRA rules: this is in line with the PRA’s general stance that its rulebook should contain rules only, not guidance.
What has yet to be decided?
The PRA have left some major issues undetermined at present. Accordingly, from commencement, there will be:
- no “standard template” for regulatory references;
- no requirement for regulatory references to be updated if new information comes to light after the reference has been given; and
- the PRA has not made any provision for collection of information by third parties under outsourcing arrangements (analogous to SUP 10C.16.2G). However that provision will apply where the proposed appointment is an appointment to perform an FCA controlled function.
In PS 16/3, the FCA announced that they intend to delay finalising the full referencing regime until after commencement, and said that they would publish a full policy statement and rules in Summer 2016.
In PS 5/16, the regulators identified several issues which they wish to consider before finalising specific rules, including:
- how best to update regulatory references;
- how to obtain regulatory references from certain overseas employers; and
- the timeline for implementation of the full regime.
The PRA says that it will issue “as soon as possible” a second tranche of rules which will cover areas where consultation feedback is still under consideration. These rules, when made, will not apply from 7 March, but from a later date (to be determined).