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Elizabeth Padley


Associate in the Employment team

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Regulatory references: the new rules of recruitment for the financial sector


On 7 March 2017, the recruitment practices of banks and insurers are changing with the introduction of mandatory regulatory references. It is expected that these rules will be rolled out to all PRA and FCA authorised firms in due course, but no firm date has been set at the moment.

The basic premise of regulatory references is that if a bank or insurer wants to hire someone to fill a relevant role, a reference must be sought from all of the applicant's former employers in the last six years. This applies regardless of whether the applicant was working in financial services for this six-year period, and regardless of whether the applicant is intended to be a contingent worker or volunteer for the new role.

Relevant roles include applicants proposed to take on senior management and/or "significant harm" functions under the Senior Managers and Certification Regime. Even if the employee has worked outside the UK, or for an unauthorised firm, the hiring firm must make reasonable efforts to secure a reference. These rules are relaxed when dealing with an inter-company transfer.

If the applicant needs regulator approval to take on the role, it is preferable that the prospective employer seeks the regulatory references before any application is made to the regulatory body. In most cases, where an applicant is taking on an FCA and/or PRA controlled function, the reference request must be obtained no later than one month before the end of the application process. For certified roles, a certificate must not be issued until the regulatory reference has been obtained.

Responding to regulatory reference requests

If your business receives a request for a regulatory reference, you are expected to respond within six weeks using the mandatory template, which is available at Annex 1 to SYSC 22. The template must be populated with the following information (and, in the absence of any information to disclose, this must be expressly stated in the reference in response to each question):

  • any facts and findings that the applicant was not fit and proper;
  • details of any breach of an individual conduct requirement;
  • any disciplinary action taken against the applicant because of the above. Disciplinary action includes the issuance of a formal written warning, reduction or recovery of remuneration, dismissal and suspension (excluding suspension pending an investigation); and
  • "all relevant information", which means any additional information which is relevant to assessing an applicant's fitness and propriety. Examples include mitigating circumstances for conduct issues and/or subsequent corrective action or good conduct by the applicant.

To comply with the reference requirement, all regulated firms must, from 7 March 2017, maintain adequate records in case they are asked to provide references for former employees. If your business does not currently have records going back to 2011, you must include a disclaimer to this effect when providing a reference.

Regulated firms are also subject to a new specific requirement to establish and maintain adequate policies and procedures to comply with the new regulatory reference requirements. We suggest that employers ensure that staff are given training on how the new regime works.

We suggest that employers ensure that staff are given training on how the new regime works.

One problematic area is where an employee resigns during an investigation into alleged misconduct. While employers are not necessarily required to supply this information in the reference, it is foreseeable that an employer might conclude that the incomplete investigation is sufficiently significant to warrant disclosure. Employers face the tricky task of balancing the above with their common law duty to take reasonable care to make sure that information included in references is fair, true and accurate. Similar issues may arise where employers are aware that staff committed a serious conduct offence more than six years ago, as the six-year time limit does not apply in such circumstances.

In practice, we consider that employers will be unlikely to include such information unless it becomes standard practice in the industry. However, employers must make a judgement call on the facts available at the time and we suggest keeping an internal note of the reasons behind the decision to include or not to include the information.

The employee's right to reply

Another way for employers to minimise the risk that any reference given falls foul of an employer's common law obligation to be true, fair and accurate is to ensure that employees have a right to comment on any allegations which the employer intends to mention in the regulatory reference.

While an employee does not have a right to comment on the reference itself, any information supplied by the employee can be taken into account by the employer when assessing whether or not any allegations made are true, fair and accurate. This is important as there is a risk of claims, such as post-employment victimisation claims, by former employees, particularly if they fail to obtain a new role and believe this is because of information disclosed in the regulatory reference.

Impact on settlement agreements

Employers must be mindful that they are strictly prohibited from entering into any agreement or arrangement with an employee about information which is supplied in a regulatory reference, on resignation or dismissal from the business. Therefore, if an employer proposes to enter into a settlement agreement with an employee on exit from the business, the terms of any agreed reference should be carefully considered.

Specifically, employers should include a carve-out which makes it clear that the requirement to supply an agreed reference will not apply when the employer is required to respond to a regulatory reference request, and/or where information is supplied after conclusion of the settlement agreement which would affect the terms of the agreed reference.

Updating references

Employers have a positive duty to update regulatory references within six years of the employee leaving the business where employers become aware of information which would have affected the original drafting of the reference and the new employer is regulated by FSMA. Where this situation occurs, employers should again consider giving employees a right to reply to the allegations before the regulatory reference is updated.

In summary, there are many practical steps which employers must take to implement and comply with the new regulatory regime. As a first step, employers are encouraged to consider the wording of their internal policies and template settlement agreements prior to 7 March 2017 in preparation for the new regime.

Author Profile Picture
Elizabeth Padley

Associate in the Employment team

Read more from Elizabeth Padley

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