Global menu

Our global pages

Close

Hong Kong regulator trying to stop “rolling bad apples” with new Mandatory Reference Checking Scheme

  • Hong Kong
  • Banking and finance
  • Financial services

13-07-2022

On 5 May 2022, the Hong Kong Monetary Authority (“HKMA”) announced the Mandatory Reference Checking Scheme (the “Scheme”), see here for the relevant announcement. The Scheme is applicable to all Authorized Institutions (“AIs”) and Phase 1 of which shall be implemented by AI by 2 May 2023.

The intention of the Scheme is to address issues arising from the movement of individuals with misconduct records between firms without their misconduct being disclosed to their new employer, the so-called “rolling bad apples” phenomenon. AIs are now under regulatory obligation to tackle such phenomenon.

Background

The HKMA conducted consultation with the banking sector in 2020 in hopes of establishing a framework to facilitate bilateral collaboration among AIs to obtain reference information for certain positions. The consultation conclusion was published by the HKMA on 3 May 2021 (see here), which gave rise to the implementation of the Scheme this year.

The Scheme

Under the new Scheme, AIs have to approach the former and current employers (which are AIs) of the relevant prospective employee for his/her conduct-related information for the past seven years. AIs receiving such requests should then respond within one month, using a standard template appended to the guidelines issued by the Hong Kong Association of Banks and the DTC Association (“Guidelines”) on 5 May 2022.

Misconduct information to be reported includes:

  1. breach of legal or regulatory requirements;

  2. incidents that cast doubt on an individual’s honesty and integrity;

  3. misconduct reports filed with the HKMA;

  4. internal or external disciplinary actions; and

  5. any ongoing internal investigations.

While AIs have the discretion for their own employment decisions, they should record the rationale for the decision if they decide to hire an employee with negative information received.

Implementation Timeline

The Scheme will be implemented by two Phases. In Phase 1, the Scheme will apply to employees including directors, chief executives, alternate chief executives and managers (as defined under the Banking Ordinance, Cap.155), executive officers and responsible officers for securities, insurance and MPF regulated activities. There will be a 12-month transitional period, and AIs are expected to implement Phase 1 by 2 May 2023.

A review of the Scheme will be conducted in mid-2025. Phase 2 will then be launched such that the Scheme will apply to individuals licensed or registered to carry out regulated activities.

Impact/Actions to be taken

In the meantime, AIs shall ensure adequate internal policies and procedures have been put in place for the Scheme. In particular, AIs should pay special attention to the following aspects:

  1. Employee records shall now be kept for seven years;

  2. Consent for reference checking shall be obtained from prospective employees;

  3. Response to the requests under the Scheme shall be given within one month;

  4. Careful consideration shall be given as to the provision of information. For example, information protected by legal privilege and confidentiality (including both the duty of confidentiality to the AIs’ customers and the secrecy obligations under section 378 of the Securities and Futures Ordinance, Cap. 571, in relation to Securities and Futures Commission’s investigations) shall be excluded; and

  5. Non-Disclosure Agreements shall be reviewed, and redrafted if necessary, to ensure that AIs’ obligations under the Scheme are addressed.

Take Away

A firm which has a potential “bad apple” amongst its staff will have to address a lot of tricky legal and regulatory issues, like self-reporting, internal investigation, protection of privilege, potential complaints from customers, potential enquiry from the regulators, etc. With the implementation of the Scheme, firms now need to further consider its obligation to stop such bad apple from rolling.

The position of future potential employer appears to be easier, but what if the past and/or current employers provide limited or vague information about the “misconduct” committed by a candidate, who, on the other hand, may be viewed from the business perspective as a key to its future growth. If the firm gets it wrong in the hiring process, and such employee eventually commits misconduct similar to those committed by him at the previous firm, the firm will not just suffer from the misconduct itself but also its failure to stop the bad apple. For instance, a disgruntled customer may have a stronger claim against the firm for compensation by arguing that the firm knew or ought to have known the propensity of the staff committing the relevant misconduct.

As such, firms should consider the requirements of the Scheme in detail and implement policies and procedures to address issues arising from its role as a current employer of staff, and also, as potential employer of future staff. The HKMA will likely consider it a mistake if AIs treat this as merely a Human Resource issue because this is clearly a matter of culture which goes to the heart of the overall good governance of AIs.