The UK’s Financial Conduct Authority has come out with a list of things that financial employers will have to put in their communications with other firms about their employees who are looking for new jobs.

The rules that are to govern these ‘regulatory references,’ as they are called, have been influenced by 30 responses to a consultative exercise. The Senior Managers and Certification Regime (SM&CR) and the Senior Insurance Managers Regime (SIMR), which will make them compulsory, are to come into force on 7 March 2017. Firms regulated by the Prudential Regulation Authority are already obeying some new ‘regulatory reference’ rules, whereas firms regulated by the FCA are still using the old ‘approved persons regime.’

The paper contains a wealth of execrable sentences such as “setting the implementation date as 7 March 2017 recognises that firms will need to update their systems and processes.” Despite this, some meaning can be gleaned from its pages.

FEMR of FICC

In 2015, the Fair and Effective Markets Review (FEMR) published some recommendations for the fixed income, currency and commodity (FICC) markets, one of which was for a compulsory form for regulatory references. The FCA and the thought that this was a good idea and consulted interested parties about it in October last year. In a paper it has just released, called PS 16/22, it sets out the new rules for regulatory references in their final form.

Changes for banks and insurers

The FCA wants banks and insurers to seek references from all previous employers in the last six years, irrespective of the type of firm or whether it is regulated. References from firms that do not perform financial services are important. The FCA notes the trouble that firms might have in obtaining references from these firms (and from overseas employers for that matter) but is still going to oblige hiring firms to “take reasonable steps” to obtain them. As this is problematic, the FCA is refusing to say what is ‘reasonable,’ being no doubt anxious to leave such judgements to the whims of its staff. A new piece of ‘guidance,’ 22.5.17 G, states that the FCA ‘expects’ firms to issue references within six weeks of being asked to do so – another probable bid for arbitrary leeway.

Contingent or contract workers

It is grammatically impossible to ‘pre-approve’ anything, but this does not stop the FCA from making rules about ‘pre-approved roles,’ a phrase that the paper does not define once. Whatever they are, the FCA wants firms to ask for references whenever it wants to hire people to perform them, and also to ask for references when it wants people to perform “significant harm functions.” This applies to “contingent or contract workers” (the FCA’s phrase for people who work for firms that do not employ them permanently) and volunteers.

People who change jobs without going to other firms or groups of firms

The new rules will allow firms in the same group not to ask for references from each other if those groups have centralised records or some alternative means of sharing relevant information as part of their assessment of candidates for “fitness and propriety” - something they are obliged to do by ss60A and 63F Financial Services and Markets Act. The recruiting firm in each group will have to obtain the necessary information to satisfy its obligations to ensure that each individual is fit and proper.

Timing during applications

Ideally, every hiring firm should obtain references before asking the FCA to approve a new appointment, but the regulator realises that this is sometimes not possible. With this in mind, it is going to allow them to obtain references no later than one month before the end of the application process. If a hiring firm has not obtained a reference before applying to the FCA and it asks for the information, the statutory clock for processing the application can be paused. Banks and insurers will have to state that references are in accordance with the regulators’ rules and, if not, will have to explain why. This appears to be another trap for the unwary.

Breach notification requirements

References will have to disclose breaches of “individual conduct requirements,” concentrating on disciplinary action. The individual conduct rules, to which this unexplained phrase presumably refers, are found in the COCON part of the rulebook and contain such vague statements as ‘you must act with integrity’ and ‘you must act with due skill, care and diligence.’ Section 64C FSMA defines disciplinary action as the issuance of a formal written warning, the suspension or dismissal of a person, and/or the reduction or recovery of part or all of his pay. Suspensions of employment imposed temporarily during internal investigations do not count; neither does the forfeiture of pay for anything that does not involve the breach of an individual conduct requirement.

Because of the deletion of s64(B)(5) FSMA, banks and insurers will only have to disclose breaches of individual conduct requirements in the ‘mandatory information’ section of the standard template if they culminate in disciplinary action.

A reference should provide a factual description of every breach (including the date on which it occurred) and its outcome. There is no ‘safe harbour’ that allows firms to keep commercially sensitive information out of such descriptions, but the FCA is open to requests for waivers.

There is to be a standard template for regulatory references. Firms will be allowed to change the format of the template as long as it does not affect what they have to disclose in accordance with the rules, and may add information about mitigating circumstances (or other qualifying information) if they choose to. The paper also states that the FCA is not requiring anyone “to provide details of an employee’s responsibilities in addition to their role.”

Changes for all firms

Some firms are already obliged to provide all information relevant to their employees’ fitness and propriety. The new rules will, when they come into force, limit the requirement to disclose ‘all relevant information’ to the same time limit as required for the mandatory disclosures, i.e. six years from the date of each request for a reference. The regulator is refusing to explain what ‘all relevant information’ means, stating helpfully: “firms will need to apply judgement on a case-by-case basis.” It does, however, state that firms will “need to consider” the law that applies to spent convictions.

The new rules also say that firms will have to keep disclosing serious misconduct even after the normal six-year time-limit for such disclosures is up. The meaning of the word ‘serious’ remains mysterious. The upshot of this rule, however, will be to oblige every firm that receives a request for a regulatory reference to go back farther than six years in every case to see if anything serious occurred, and then to divulge it in the reference.