The regulatory reference regime:final rules

Why the regulatory reference regime has been introduced

The regulatory references regime is part of a wider package of reforms aimed at improving accountability in financial services firms and larger insurers. The Fair and Effective Markets Review recommended that the regulators for financial institutions and insurers, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), should consult on a mandatory form for regulatory references to help firms prevent the recycling of individuals with poor conduct records between firms. 

What does it mean?

On 7 March 2017 the regulatory references regime came into force for financial institutions that fell within the definition of ‘relevant authorised persons’ in the Financial Services and Markets Act 2000 and insurers within the remit of the Solvency II Directive, to coincide with the wider application of the regulators’ Conduct Rules to all staff other than ancillary staff and full implementation of the new Certification regime.
The FCA and the PRA issued policy statements (PS16/22 and PS27/16) setting out feedback on consultation and the final rules on regulatory references. Regulatory references are primarily a tool for firms not regulators and it is hoped that best practice will develop to address misconduct and assess fitness and propriety.
Each policy statement contains a revised regulatory references template alongside the final sets of rules. The rules can be read here: 16.pdf

Who does it apply to?

The regulatory references regime applies to banks, building societies, credit unions and PRA investment firms (known as relevant authorised persons, ‘RAPs’), the Society of Lloyd’s and Solvency II or large non-directive insurers recruiting candidates to:
•  senior management functions (SMFs)
•  senior insurance management functions (SIMFs)
•  FCA controlled functions (CFs)
•  significant harm functions (SHFs) and
•  individual candidates for regulatory roles in the Senior Managers and Certification Regime (SM&CR) and the Senior Insurance Managers Regime (SIMR).
Once the SM&CR is extended to all other firms authorised under the Financial Services and Markets Act 2000 (FSMA) the regulators will probably extend the regime to all regulated firms.  The regulators are assessing the effectiveness of the regulatory references regime and will decide whether to similarly extend its application to all regulated firms although it is anticipated that the regime will be rolled out across the board. In any event, all regulated firms will be obliged to provide a regulatory reference when required to do so.

Interim rules

The PRA and FCA jointly published consultation paper PRA CP36/15 and FCA CP15/31 ’Strengthening accountability in banking and insurance: regulatory references’. The regulators received 30 responses, most of which supported the consultations’ underlying objective of ensuring that employment references that pass between firms when individuals move roles (‘regulatory references’) are an effective tool for employers to assure themselves that they are hiring the right people. However, respondents raised several issues which the PRA and FCA wished to consider further before finalising specific rules.
Interim rules applied from 7 March 2016 which allowed the regulators time to address the concerns and publish final rules (which apply from 7 March 2017).

Regulatory References: the final rules

Under the regulatory regime from 7 March 2017 firms must:
• Obtain references before regulatory approval or certification
• Take reasonable steps to collect regulatory references for regulated roles for the past six years
• Include concluded breaches of Conduct Rules under the SM&CR, breaches under Statements of Principle and the Approved Persons Regime and details of disciplinary action taken
• Update references where matters arise that would affect any reference given in the past six years
• Make disclosure in the form of the mandatory template provided, even where there is no relevant information to disclose
• Not enter into any arrangement or agreement that limits a firm’s ability to disclose relevant information (this is key: arrangements which agree reference wording as part of a settlement agreement/ COT3 will be caught)

References must be obtained prior to appointment which means that when someone is being appointed to a Senior Manager role the firm must obtain a reference before applying for regulatory approval. There is a mandatory template which RAPs must use when responding to reference requests.

Regulatory references should focus on regulatory matters only (e.g. fitness and propriety or confirmed misconduct) and contain the following:
• Details of any certification function or controlled function or of any notified NED, credit union NED or KFH role held, summarising the role
• Details of any other roles performed while an employee of the firm (or any firms in a group)
• Details where a regulated firm has concluded that at any point in the last six years that the candidate was not fit and proper to perform a function and the background facts
• Details of any disciplinary action taken as a result of the two points above.

Retention of records

The rules require RAPs to retain records of former employees’ conduct and fit and proper status for a period of six years after termination or resignation and they will be required to establish and maintain adequate policies and procedures to comply with the rules.

Common law duties

Common law duties should not be overlooked when preparing a reference. These include the duty not to give a negligent or false reference and to ensure that the information contained in the reference is accurate, true and fair. Employers should also be alert to risks of claims for defamation, malicious falsehood and negligent misstatement.

Points to note

• The regulators noted the potential difficulties in obtaining references from non-FS firms and overseas firms but underlined the obligation for firms to take reasonable steps to obtain a reference. Each firm should judge what constitutes reasonable steps.
• The PRA states that it will take into consideration any relevant legal impediments when assessing whether a firm has taken reasonable steps.
• The FCA has added guidance to say it expects regulated firms to provide a reference within six weeks.
• Firms within a group do not have to request a reference from each other where the group has centralised records or alternative means of sharing relevant information as part of the fitness and propriety assessment
• Where requesting or providing a reference would require the making of a public announcement/ market-sensitive notification, references can be obtained at any time during the application process
• Firms need only include reference to breaches of conduct rules etc where disciplinary action has been taken (so suspensions imposed pending disciplinary action do not have to be disclosed)
• The regulators have provided guidance on the level of information to be provided in the standard template
• The requirement for responsibilities to be included has been removed
• Firms now only need to provide an updated reference to the current employer
• The six year look-back period starts on the date that the individual’s employment with the firm terminates
• Serious misconduct that occurred more than six years previously should be disclosed if it comes to light within six years from the date the individual left the firm
• Record keeping requirements have been limited to six years retention of disciplinary and fitness and propriety findings
• The reduction or recovery of remuneration should only be notified to the regulator and included in a regulatory reference if it is imposed due to breach of an individual conduct requirement.