On 6 October, the FCA and PRA issued a joint consultation paper (FCA CP15/31 and FCA CP36/15) proposing changes to the duties of banks and insurers in relation to obtaining and providing regulatory references for candidates for certain roles. The proposals are part of a wider programme of change to the regulatory regime for individual accountability, in the form of the Senior Managers and Certification Regime (SMCR) for banks and PRA-authorised investment firms, and the Senior Insurance Managers Regime (SIMR) for insurers, which will come into force early next year.
The final report of the Fair and Effective Markets Review (“FEMR”), published in June 2015, recommended that the rules on regulatory references should be tightened up to prevent the problem of “rolling bad apples” in the financial services industry, who avoid accruing a poor conduct record by simply moving firms. These consultation papers contain the regulators’ response to those recommendations.
The proposed changes apply in respect of candidates for Senior Management Functions and Significant Harm Functions under the SMCR; PRA-designated Senior Insurance Management Functions, and FCA Controlled Functions under SIMR; as well as notified Non-Executive Directors (NEDs), credit union NEDs and Key Function Holders within insurers.
The consultation runs for 2 months closing on 7 December 2015, following which the final rules on regulatory references will be introduced in time for the start of the new accountability regime on 7 March 2016.
The main proposals affecting deposit-takers and PRA-authorised investment firms (known as “relevant authorised persons” or “RAPs”) and insurers are:
- A requirement to request regulatory references going back six years from former employers of candidates applying for certain roles (regardless of whether or not the previous employer is a regulated entity);
- Introducing new specific disclosures that must be included in references, including a mandatory requirement to disclose whether candidates for relevant roles have in the previous 6 years been found to have committed any breaches of the conduct requirements of the FCA conduct rules, the PRA conduct rules or conduct standards or the Statements of Principle and Code of Practice for Approved Persons;
- A requirement to provide such disclosures by completing a standard template, including stating if there is no relevant information to disclose;
- Imposing a continuing obligation to update references given in the previous 6 years where the former employer becomes aware of matters that would have caused them to draft the reference differently if they were drafting it now; and
- Including compliance with the new regulatory reference rules as one of the prescribed responsibilities for Senior Managers in RAPs and insurers.
Further proposals affecting all authorised firms include:
- An express prohibition against firms entering into arrangements that conflict with the new regulatory reference obligations; and
- A requirement on firms to implement adequate policies and procedures to ensure compliance with the requirements relating to regulatory references, including requiring firms to retain records of former employees’ conduct and fitness and propriety for a minimum of 6 years following their departure from a firm.
The FCA and PRA are considering whether the specific proposals for RAPs and insurers should be extended to all authorised firms.
What is not being proposed
We are delighted to see that the regulators have apparently decided not to take up the FEMR’s recommendation (see page 64 of the FEMR final report) that regulatory references should disclose instances where an individual’s remuneration had been adjusted for risk management failures. In our view, this would have resulted in disclosures having to be made where the relevant individual had not been directly at fault, or in breach of any conduct rule. Instead, the regulators have stipulated that reductions in remuneration must be disclosed only if they result from formal disciplinary action against the individual. The PRA and FCA have made the right decision in proposing to implement this recommendation in a sensible and proportionate manner.
What does this mean for employers?
The existing rules (which can be found in the FCA Handbook at SUP 10A.15) governing firms’ duties in respect of providing regulatory references will be clarified and strengthened by the new rules. In particular:
- The period to be covered by regulatory references has been extended from the 5 years originally proposed by the regulators to 6 years.
- The matters to be covered in regulatory references are to be prescribed in detail in the PRA Rulebook and FCA Handbook.
What should you do now?
Affected firms’ HR and Compliance functions need to:
- review and update their record-keeping systems, to ensure that the necessary information is retained for at least 6 years and so that, going forward, previous references can be updated where necessary.
- review their policies and procedures in relation to references, and update those where necessary.
However, since it is proposed that responsibility for a firm’s compliance with these new rules must be allocated to individual Senior Managers within banks, PRA-investment firms and insurers under the new regime, HR and Compliance departments should have little difficulty in persuading their senior management teams to give sufficient resource to the implementation process.
Report: How should you respond to developments in financial regulation this year?
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