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‘No win, no fee’ - are clients being hoodwinked?
Dale Gibbons
First introduced for banks and insurers in March 2017, regulatory references are now a requirement for all firms regulated by the Financial Conduct Authority and Prudential Regulation Authority, under the senior manager and certification regime.
Regulated employers must seek and provide regulatory references about those they intend to promote or appoint to certain regulated roles, including employees, contractors and even non-executive directors.
They may also receive requests to provide regulatory references for outgoing or former members of staff.
The regime was introduced in an attempt to stop “rolling bad apples” from moving from job to job within the industry, and as part of the move towards greater individual accountability in financial services, also supported by the SMCR and conduct rules.
As with other aspects of the SMCR, the onus is very much on firms to make decisions, keep and share information on the fitness and proprietary of those who it appoints to senior executive roles.
So what does the regulatory reference regime entail for regulated employers and what are the rights of individuals who are given an adverse reference by their previous employer.?
What is a regulatory reference?
When appointing an individual to perform a controlled function, certifying an individual as fit and proper or appointing to certain other positions, including board director, a firm must take reasonable steps to obtain a regulatory reference from the individual’s current employer and anyone who has been their employer in the past six years. There is a prescribed form for both the request and response.
A firm has an obligation to provide a regulatory reference as soon as reasonably practicable if it receives a request from another firm that is considering appointing someone to a controlled function, certifying them as fit and proper or appointing them to certain other positions, including board director.
While there is guidance as to what constitutes serious misconduct, this is not clear cut.
Prospective candidates cannot formally take up a new role without a regulatory reference first having been received.
There is no territorial limitation on the rules so a reference has to be provided even if the individual worked in an overseas office of a firm. If the overseas employer or the individual was not a firm it will have no obligation to provide the reference.
A firm has an obligation to update a regulatory reference if there is a significant change to the information provided, whether due to new facts coming to light or the firm reaches a new conclusion about matters relating to fitness and propriety.
What are the key aspects of a regulatory reference?
The most important questions in the regulatory reference template (found in the FCA handbook) are:
- Question E – have you concluded that the individual was not fit and proper to perform a function?
- Question F – a yes or no question format concerning disciplinary action that is relevant to a breach of the conduct rules or to whether the individual is fit and proper.
- Question G – are you aware of other information you reasonably consider to be relevant to your assessment of whether the individual is fit and proper?
In responding to question G, the firm only needs to disclose information about something that either (i) occurred or existed in the period starting from six years before the date of the reference request up until the date the reference is actually given, or (ii) was serious misconduct.
Where there is a course of conduct that ended during the six-year period the whole of that course of conduct should be captured, including any part of it before the six-year period started.
While there is guidance as to what constitutes serious misconduct, this is not clear cut. Matters that do not relate to the performance of a regulated function, such as non-financial misconduct, can be relevant to the fit and proper test and, if they are, will have to be disclosed in response to these questions.
In giving a regulatory reference a firm should use the FCA’s template, and is required to provide the information it specifies, but can choose to supply additional information, including information that is more than six years old.
There is a general requirement that any reference given should be fair, accurate and based on documented fact.
An example of the general obligation to be fair is that the firm should not provide any information in a regulatory reference unless the individual has had an opportunity to comment on that information but not necessarily on the wording of the reference itself.
In the case of historical disciplinary matters, for example, the individual will typically have had an opportunity to comment in the course of the original disciplinary proceedings so no further opportunity to comment is necessary at the time the reference is written.
What about ongoing or incomplete disciplinary proceedings?
There may be situations in which disciplinary proceedings are ongoing when the reference request is received or which were not concluded before employment terminated.
The FCA’s guidance states that a firm is not necessarily required to disclose that an individual left while disciplinary proceedings were pending.
However, unless the disciplinary proceedings relate to something trivial that is not relevant to whether the individual is fit and proper, a firm will normally take the view that unfinished disciplinary proceedings should be disclosed in response to question G.
The firm will normally seek to conclude disciplinary proceedings before employment terminates but, where this does not happen, in compliance with its duty of fairness, the firm should give the individual an opportunity to comment on the allegations before writing the reference.
Refusing to participate is likely to result in an adverse reference, as is resigning before a disciplinary procedure can be completed.
This can result in a former employee being invited to a quasi-disciplinary hearing to respond to allegations that have arisen after employment has terminated or which have been subject to an unfinished disciplinary process, so that the firm can refer to them in a regulatory reference.
The duty of fairness only requires the individual to be given an opportunity to comment, so if they refuse to participate the firm is free to go ahead and refer to the matter in the regulatory reference.
Where an individual does comment on allegations, the firm is not required to set out those comments in the reference but should take them into account when forming its own view and writing the reference.
A regulatory reference must be written on the basis of the knowledge of the firm when it writes the reference. This means it is not necessarily possible to agree the form of the reference on termination of employment if, for example, financial or non-financial misconduct issues come to light at a later date.
It is possible for individuals to obtain a draft of the reference that the firm would write on the basis of its knowledge at that time. The FCA’s rules expressly prohibit agreements to exclude information from regulatory references so the firm must be free to revise that draft in the light of later knowledge or events.
What can an individual do about an adverse regulatory reference?
This is a serious issue as many firms will not recruit anyone who has any kind of issue with the terms of their regulatory reference.
If the individual has been given an opportunity to comment on the allegations before the reference is written then they can do so and try to persuade the firm that there is no substance to the allegations or that they are not relevant to fitness and propriety. Sometimes this will mean participating in a quasi- disciplinary procedure.
Refusing to participate is likely to result in an adverse reference, as is resigning before a disciplinary procedure can be completed.
In the case of very serious allegations where there may be an FCA investigation, the individual may refuse to participate in the firm’s process and reserve their defence for the FCA’s regulatory investigation.
The FCA’s rules expressly prohibit agreements to exclude information from regulatory references.
Any regulatory reference is then likely to refer to the matter in terms which make employment in another regulated role unlikely, but it may also give the individual a better chance of achieving a favourable outcome to any subsequent regulatory action.
An individual might have a number of claims arising from the giving of an inaccurate reference including:
- Negligent mis-statement where the firm negligently breaches its common law duty to exercise due skill and care by providing an inaccurate reference. Damages may be awarded for financial loss and psychological damage or damage to reputation.
- Defamation if the reference contains untrue statements that may damage the individual’s reputation. However, references are subject to the defence of qualified privilege since the firm has a duty to provide them and the recipient has a duty to receive them, so the individual would have to prove not just that the information is inaccurate and damaging to their reputation but also that the writer of the reference knew this and acted with malice.
If all else fails, the subject of an adverse regulatory reference can wait until the six-year period has elapsed before applying for another regulated position in the UK.
However, even this may not succeed; for example if the new employer seeks references going back more than six years and previous employers agree to provide them. An individual taking this approach would, in any case, be a very slow-rolling bad apple.
It is more likely the individual will find that he or she is required to disclose adverse matters in any event. Applications for senior manager approval and most firms’ certification forms, to be completed at on-boarding for certified roles and reconfirmed on annual basis thereafter, ask a broad range of questions relating to investigations, suspensions and disciplinary matters.
Significantly, these questions are not time limited and may require the disclosure of matters beyond those that appear on the regulatory reference, including those going back more than six years.
It is therefore important to remember that regulatory references are only one part of a broader regime, which can make it difficult in practice for individuals to move on within the regulated sector, particularly for those at an early stage of their careers in what is an increasingly competitive industry.
First published in FTAdviser on 30th January 2024.
FURTHER INFORMATION
If you have any questions or concerns about the topics raised in this blog, please contact Adrian Crawford in our Employment team and Jill Lorimer in our Criminal team.
about the authors
Adrian Crawford is a partner in the Employment Department and also deals with partnership matters. His practice has a particular focus on City, financial and professional services and he advises employers, partnerships, partners and senior employees. Many of his matters involve regulatory issues. He also has a particular interest in TUPE.
Jill Lorimer is a partner in Kingsley Napley’s Financial Services Group and has an extensive track record in advising firms and individuals facing regulatory and criminal investigations by the Financial Conduct Authority (FCA).
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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