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Are you ready for regulatory references?

29 March 2017

On 7 March 2017, stringent new rules on references for the financial services sector came into force. This is the latest stage of implementation of the FCA and PRA’s new Senior Manager & Certification Regime (SM&CR), which came into effect in March 2016.

For now, the new rules apply to ‘relevant firms’, which means banks, building societies, credit unions, the larger investment banks regulated by the PRA and branches of foreign banks operating in the UK. There are plans afoot to extend the SM&CR to all regulated firms during 2018, which are currently under consultation. It remains to be seen as to whether the regulatory references rules will also be extended more widely.

Relevant firms are now required to obtain regulatory references before appointing individuals to perform certain specified functions. The rules apply both where an individual moves from firm-to-firm and also to a different role within the same firm. The firm must take reasonable steps to obtain references from all of the individual’s former employer(s) covering the previous six years, whether or not the former employer is an authorised firm.

Obligations on firms

Banks and other relevant firms are now also bound to comply with the regime regarding the references they give, and must use a specific template to do so.

They must disclose details of:

  • concluded breaches of individual conduct requirements
  • findings that individuals are not fit and proper
  • disciplinary action

‘Disciplinary action’ is fairly narrowly defined to mean a formal written warning, suspension or dismissal and reduction or recovery of any of the individual’s remuneration.

There is also a continuing obligation on firms to update any references given over the past six years, if it becomes aware of information that is new, or which means that the reference is no longer accurate. This obligation applies to references provided on or after 7 March 2016.

There is no scope for a firm to agree a reference which is not compliant, nor to restrict itself to a form of words which would conflict with its obligation to update a reference if new material comes to light.

Individual accountability

The new rules progress the regulators’ policy of increasing individual accountability, by making firms primarily responsible for assessing and monitoring individuals’ conduct. The aim is to stop the ‘rolling bad apple’ – the unfit employee who moves from firm-to-firm.

Those advising both banks and individuals should ensure full understanding of the rules and their impact on recruitment and exit processes.

You can read our earlier eBulletin on the SM&CR here.

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