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BSB guidance to help firms request and provide regulatory references

  • United Kingdom
  • Employment law
  • Financial institutions

17-09-2019

All firms subject to the senior managers and certification regime (SMCR) must request and provide regulatory references for their certified staff, senior managers and notified non-executive directors. The regulatory reference rules were introduced in March 2017 (initially to the banking and larger insurance sectors) to tackle the problem of the ‘rolling bad apple’ (the employee with the poor conduct history who moved from firm to firm to avoid censure). The rules will be extended to solo regulated firms with the rollout of the SMCR in December 2019. However, the rules are neither straightforward nor risk-free. In the recent FCA banking stocktake report 1, most banking firms felt that the industry had some way to go to improve the quality and timeliness of references and there were concerns about the inconsistency among firms of recording conduct breaches.

BSB good practice statement on regulatory references

Good news comes in the form of the recent Banking Standards Board (BSB) good practice statement on regulatory references. Whilst primarily aimed at the banking sector and at certified staff, the guidance has wider application to other firms subject to the SMCR and to all employees subject to regulatory references. Solo regulated firms with less extensive human resources capacity are particularly likely to find the guidance of practical use.

The BSB will keep the guidance under review and when there is sufficient feedback from firms there will be further guidance on difficult issues such as the misconduct threshold for disclosure in Box G in the template reference form.

Key points from the guidance

The BSB notes the fine balance that must be struck by firms between legal and regulatory obligations on the one hand and ethical principles (such as transparency of process and consideration of an employee’s livelihood and career) on the other. To this end, regulatory reference policies and practices should be fair, proportionate and consistent. The BSB sets out clear guidance on how firms should incorporate these three principles into policies and practices.

Fairness: a reference should be fair to the individual without compromising the integrity of the reference and should be fair to the industry as a whole. For example, firms should:

  • Ensure that the information is recorded in a fair way that allows the individual’s perspective is considered.
  • Consider whether an individual should be given a second opportunity to comment on past conduct issues.
  • Provide a factual account of un-investigated allegations of poor conduct relevant to a fitness and propriety (F&P) assessment after the individual has left the firm.
  • Ensure that individuals are aware of the content of the reference and where appropriate are informed (during internal procedures) where an issue could impact a regulatory reference.
  • Ensure regulatory references are appropriately transmitted to other firms (e.g. encryption) in light of the sensitive personal information contained.

Proportionality: a firm’s practices should be proportionate in relation to individuals and other firms. Relevant information should be identified and verified and references should be fair and consistent. For example, firms should:

  • Consider what factors are relevant to deciding whether it is proportionate to include information in a regulatory reference.
  • Consider what constitutes what ‘reasonable steps’ should be taken when sourcing information for a reference.
  • Have a clear policy and processes in place around what information should be recorded
  • Ensure key teams and others involved in the F&P assessment process are aware of the need to escalate an allegation of poor conduct against a former employee for the purpose of revising a reference.

Consistency: references should be consistent in the way individuals are treated, with other processes in the firm and, as far as possible, between firms in the quantity and quality of information provided. For example, firms should:

  • Consider what factors are relevant in deciding what information to include.
  • Ensure the information included is consistent with that included for other regulatory references provided by the firm.
  • Have processes in place to ensure all relevant information is gathered consistently and systematically from around the firm.
  • Ensure the content of the reference is consistent with information previously communicated to the individual.

Good practice when providing and obtaining regulatory references

The BSB also provides useful practical help on providing and obtaining a regulatory reference. For example, sometimes a line manager (rather than HR) will be contacted to provide a reference. Line managers should understand what a regulatory reference is and how the firm deals with such requests.

The BSB suggests that the two key questions a firm should ask itself on receipt of a reference request are:

  • Who is the request from? Is the request from a third party such as recruitment consultant? Is it legitimate or a ‘fishing’ exercise?
  • What is being requested? Is more information being required than is included in the template?

When providing a regulatory reference, difficulties can arise where, for example the firm providing the reference is not a SMCR firm or is an overseas firm. The BSB suggests providing a regulatory reference email address on their website so that other firms can communicate easily. There may also simply be a need for extra time where a difficult issue is being discussed.

Information to be included in a reference

This section of the guidance considers good practice in less straightforward situations (where more judgment may be required) such as where:

  • References contain adverse information about an individual. Employees should be made aware that the outcome of disciplinary proceedings and decisions relating to malus and clawback and conduct rule breaches over the past six years will be included in a reference. Firms must make a judgment call over older breaches (would the information be relevant had the employee remained with the firm?).
  • Disciplinary procedures are incomplete. A firm may disclose unverified information; this requires a delicate balancing exercise between the need to alert a prospective employer of a conduct risk with the need to be fair to the individual. Firms receiving references that disclose unverified information should seek further details from the prospective employee. Firms giving references should consider periodically checking whether relevant factors are being reported consistently and/or whether the firm is being fair and consistent with individuals in seeking and taking account of their views.
  • Decisions about incoming references are balanced. Firms should seek to make balanced decisions about hiring an individual whose regulatory reference discloses negative information, rather than use the regulatory reference as a binary screening tool.
  • A regulatory reference is revised. This is only likely to be necessary in a minority of cases.

Read the guidance here. 

We are the authors of ‘Eversheds Sutherland: the Employment Practitioner’s Guide to Financial Institutions’ published by Bloomsbury, a practical guide to the senior managers and certification regime and remuneration in financial institutions.

1 https://www.fca.org.uk/publications/multi-firm-reviews/senior-managers-and-certification-regime-banking-stocktake-report

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