Regulatory references in the financial services industry – PRA & FCA consultation

12 October 2015

The reforms of the FCA and PRA in relation to the regulation of firms and individuals in the financial and insurance industries continue apace.  The new Senior Managers Regime will come into force in March 2016. Responsibility for assessing the fitness and propriety of senior managers and others will shift away from the regulators to the institutions themselves. 

As part of this regulatory shift, earlier this year the Fair and Effective Markets Review recommended that the FCA and PRA consult on a mandatory form for regulatory references to prevent the ‘recycling’ between firms of individuals who have poor conduct records. In response to this, the FCA and PRA have initiated a consultation which will look to shore up the rules applying to regulatory references in order to enhance the ability of firms to make informed decisions about who to employ, as firms will in future be responsible for the ‘fit and proper’ assessment, a decision which previously rested with the regulator. This is seen as particularly important given the new regime on accountability.

The consultation sets out proposals for regulatory references for candidates applying for:

  • Senior management functions under the Senior Managers Regime.
  • Significant harm functions under the Certification Regime.
  • PRA senior insurance management functions under the Senior Insurance Managers Regime.
  • FCA insurance controlled functions.
  • Notified non-executive director (notified NED) roles within a Relevant Authorised Person (“RAP”: deposit taking and PRA investment firms) or Solvency II (insurance) firm.
  • Non-executive director roles in credit unions.
  • Key function holders and notified NED roles within an insurer.

This therefore affects a broad range of financial services and insurance firms, and significant numbers of their staff. 

Main proposals

There are a number of different proposals which have been put forward. Perhaps the most notable is that when candidates apply for Senior Management Functions or significant harm (certification) functions in RAPS or insurers, the firm will be obliged to request regulatory references from former employers spanning back 6 years. This obligation would apply whether the past employer was an authorised entity or not. It could also apply even if the firm recruited from their own firm or another group company, so in this sense it is a very wide obligation in terms of scope that is being proposed. The PRA also propose a similar requirement for candidates applying for a role as a key function holder, a notified NED or as a credit union NED.

Increased responsibilities in relation to the obligation to disclose information within references are also proposed for RAPS and insurers. The proposals would make it clear that certain information was mandatory and therefore must be included in the reference, unless there was no relevant information in which case this must be expressly stated. Such mandatory information would include, for example, breaches of conduct requirements under the FCA or PRA rules, past and present. In deciding what information to define as mandatory, the consultation drew heavily upon the findings of the Fair and Effective Markets Review. For example, it was decided not to compel firms to disclose information regarding adjustment of remuneration, since this could sometimes be altered for purely commercial reasons rather than it arising from fitness or propriety.

Outside of the mandatory requirements, the proposals generally dictate that the relevant firms exercise sound judgment in deciding what to include in such references. There is also an interesting requirement that such firms update any references they have given in the past six years where they become aware of matters that would have caused them to draft the reference differently had they known at the time. Such proposals demonstrate the long term obligations and aims which the regulators have in mind.  Although the proposals are reflective of the current regulatory regime, under these proposals firms are facing a significant increase in their responsibilities in relation to references, and the very brief references that have been so common in the industry for years will no longer suffice. This will be a significant cultural change.

All authorised firms

There are also proposals that are aimed at all authorised firms. These include an obligation upon such firms not to fetter their discretion by entering into agreements which would impact upon their ability to give truthful references. This rule would apply to resignations as well as to terminations. There are additionally plans to improve retention of records, by compelling that firms retain records of ex-employees for 6 years following departure.

This consultation is the next step in the implementation of the new Senior Managers Regime.  Responses to the consultation are due by 7 December 2015 the comments made will be interesting, as they will reflect the views of the industry to this significant shift in regulatory responsibility.

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