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New Financial Services Reference Rules Go Live Next Week – In Part…

New Financial Services Reference Rules Go Live Next Week – In Part…

The new PRA/FCA rules on employee references go live on 7 March, although some of the regulators’ proposals have been delayed following issues being raised during the consultation.

1. Summary of the Proposed New Rules

By way of reminder, these new rules are being introduced to “help firms prevent the ‘recycling’ of individuals with poor conduct records between firms”. The proposals for regulated entities covered five key areas:

Timing – institutions seeking to appoint someone to a relevant role (see a summary of the roles below) must request a reference/references covering the candidate's employment in the preceding six years.

Content – the reference from the ex-employer must include:

  • Details of specified senior role(s) held and a summary of what the role involved/its responsibilities.

  • Details of any other roles performed while an employee of the firm, or as an employee of any firms within the same group, in the preceding six years.

  • Where the ex-employer has concluded in the six years preceding the reference request that the candidate was in breach of regulatory rules, the facts that led to that conclusion.

  • Where the firm has concluded in the six years preceding the reference request that the candidate was not fit and proper to perform a function, the facts that led the firm to that conclusion.

  • Details of the basis and outcome of any disciplinary action resulting from the preceding points above, including details of formal warnings or any adjustment to the individual's remuneration.

Consistency – a mandatory template for regulatory references.

Updating – ex-employers must revise a regulatory reference they have given in the previous six years if they become aware of matters that would cause them to draft that reference differently if they were drafting it now (this would only apply for references given after 7 March 2016).

No Contracting Out – employers cannot enter into arrangements (e.g. as part of a settlement agreement) that conflict with the regulatory reference rules. This would prevent an ‘agreed’ reference that does not comply with the requirements outlined above.

The rules are to apply to candidates applying for the following functions or roles:

  • Senior management functions (SMFs) under the Senior Managers Regime. 

  • Significant harm functions under the certification regime (i.e. roles where the person performing it will be involved in aspects of the firm's affairs  that might involve a risk of significant harm to the firm or any of its customers). 

  • PRA senior insurance management functions under the SIMR.

  • FCA insurance controlled functions. 

  • Notified non-executive director (NED) roles. 

  • NED roles in credit unions.

  • Key function holders (KFHs) and notified NEDs within an insurer.

2. So What’s Coming Into Force Now?

Some serious concerns were raised during the consultation period, in particular in relation to the requirement to update references. As a result, full implementation of all the new rules has been delayed so that these issues can be considered in more depth. Therefore, from 7 March 2016 most of the rules will apply, but:

  • There will not be a “standard template” for regulatory references.

  • There will be no requirement for regulatory references to be updated if new information comes to light after the reference has been given.

The FCA and PRA plan to publish the final rules this summer.

3. What About Employment Law?

As has always been the case, employers must take reasonable care when writing a reference. Therefore, employers should ensure that, in creating a reference to comply with the new rules, care is still taken to avoid information being included that cannot be supported by evidence. If an employee leaves during an investigation the fact that the investigation was ongoing should be included rather than including a conclusion.

Provided that the points referred to above about ensuring the accuracy of the reference’s contents and having evidence to support those contents are borne in mind, compliance with the regulatory requirements should not create employment law liabilities. There should be no issue including information such as:

  • Relevant disciplinary sanctions/investigations.

  • Issues relating to the individual’s ability to perform a role, e.g. qualifications, ongoing training, etc.

  • Issues relevant to the individual’s honesty, integrity and reputation.

  • Matters relevant to assessing financial soundness, e.g. bankruptcy or similar proceedings.