Increased FCA focus on individual accountability: Changes to Regulatory References

Employment and Pensions E-Bulletin Article

HOLLAND ClaireOn 7 March 2016, significant regulatory changes will be introduced for banks, PRA-designated investment firms and insurers when the Senior Managers and Certification Regimes (SMCR) will come into force.

Claire Holland, senior associate, looks at the changes and how they will affect businesses. 

A new regulatory dawn…

The SMCR proposals have been on the horizon for some time and there have been various stages of FCA and PRA consultation on the proposed changes. In essence, the changes give rise to a shift in responsibility in assessing the fitness and propriety of certified persons from the regulators to employers. Previously, employers would be required to notify the regulators of matters that may affect an individual's fitness and propriety by submitting Forms C (Ceasing to perform controlled functions) and D (Notification of changes to approved persons' personal information or application details). However, under the SMCR this system is to be removed so that the regulator will no longer hold the same level of information on individual's fitness and propriety and, instead, the employer will be responsible for assessing the fitness and propriety of certified persons. Further information on the SMCR can be found in our article.

Changes to regulatory references

As part of the package of SMCR changes that are due to come into force, one area of focus has been on regulatory references. It is proposed that those institutions affected by the SMCR will be required to introduce a number of changes to the way that they currently provide regulatory references. Where those firms are looking to appoint a senior manager, certified person or certain NED roles under the new SMCR, the following will apply:

  • A requirement to take reasonable steps to obtain appropriate references going back six years (not five years as was previously the case) from former employers of candidates. This is regardless of whether the past employer is an authorised entity or not
  • A requirement to obtain such references for internal moves if the individual has been employed outside the firm in the previous six years. This will be relevant where an existing employee is being appointed for the first time to a senior manager or certified person role
  • The references must be obtained before an application for senior manager approval is made or before certification is issued to a certified employee
  • New specific disclosures must be included in reference, including, as a minimum, whether candidates for relevant roles have in the previous six years breached individual conduct requirements or were not fit or proper to perform a function, and details of any linked disciplinary action
  • Use of a standard template introduced by the PRA and FCA to provide disclosures, including stating if there is no relevant information to give
  • Imposing a continuing obligation to update references given in the previous six years where the former employer becomes aware of matters that would cause it to draft the reference differently. This will only apply to references given on or after 7 March 2016

When will these changes come into effect?

As a result of concerns raised during the joint FCA and PRA consultation on regulatory references in October 2015, the PRA announced in February that it wishes to consider a number of issues further before finalising specific rules, in particular:

  • How best to update regulatory references.
  • How to obtain regulatory references from certain overseas employers.
  • The timeline for implementation of the full regime.

Consequently, the PRA has now issued the first tranche of rules that will apply from 7 March 2016. In conjunction with existing rules, PRA-regulated firms will be required when considering the appointment of employees under the SMCR to:

  • Provide references to another regulated firm upon request, as soon as reasonably practicable, containing all relevant information of which the firm is aware.
  • Take reasonable steps to obtain appropriate references covering at least the past 5 years of service from that person’s current and previous employers.

Following this, the PRA will, together with the FCA, issue a second tranche of rules, which will cover those areas where consultation feedback indicated that there may be possible gaps.

The FCA intends to publish the final rules in summer 2016 and there will be a transitional period to allow firms time to implement any changes. As an interim measure, the FCA has continued the current referencing requirements under the approved persons regime for pre-approved roles in relevant firms and insurers. The rules are set out in the Individual Accountability (Regulatory References) (Interim Requirements) Instrument 2016 (FCA 2016/7).

Do these changes affect all authorised firms?

As explained above, the main changes that are being introduced are part of the new SMCR rules that will only affect a limited number of firms including banks, building societies, credit unions and large investment firms. However, a number of the proposed changes will affect all authorised firms.

  • All authorised firms must not enter into any arrangements or agreements that limit their ability to disclose relevant information when providing regulatory references. The proposed rule applies to resignations as well as terminations
  • All authorised firms must ensure that they have 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 proprietary for a minimum of six years following their departure from a firm

The first proposal is likely to be the most difficult to implement given the potential impact on any negotiations or settlement discussions where an approved person is being exited from a firm, particularly where a regulatory reference is being agreed as part of any settlement agreement. This is most likely to be an issue where the employee's conduct appears questionable but the parties have reached an agreement to part ways before the matter has been fully investigated or a decision made.

As well as regulatory requirements that apply to references, there is also a common law duty to give a true, accurate and fair reference. As such, employers can sometimes be wary of disclosing the fact that an employee has resigned before or during a misconduct investigation. However, an employee will certainly not want this information included. Where the FCA has been notified on a Form C that an approved person has left in these circumstances, the position is clearer as the FCA has the information needed to assess whether the person could be deemed fit and proper. However, under the new SMCR proposals, notification on Form C is no longer required and there is no express duty for the employer to investigate and to disclose this information in any regulatory reference. In fact, to do so could increase the risk of common law claims from the employee for failure to give a true, accurate and fair reference. Equally though, if this information is not disclosed, there could be a risk of a claim from the new employer on the same grounds and possibly regulatory implications too.

Given the uncertainties in this area, best practice is for employers to err on the side of caution and disclose the existence of any incomplete disciplinary investigation in any regulatory reference, making it clear that no findings (positive or negative) were made. Understandably this may not be acceptable to employees, particularly under the new SMCR proposals. Therefore, employers may need to alternatively consider accelerating their disciplinary investigations or ensuring that outgoing employees remain involved in any ongoing investigation or disciplinary process so that the employee is able to challenge the allegations against them. This will also be of importance where employers are required to update regulatory references given over the past six years under the new SMCR proposals.

Are further changes ahead?

It seems that the wind of change is upon authorised firms as the PRA and FCA continue to introduce changes aimed at increasing the accountability and responsibility of firms and their senior employees. Whistleblowing changes are coming into force in March and September this year for UK deposit-takers with assets of £250m or more, including banks, building societies and credit unions, PRA-designated investments firms and some reinsurance and insurance firms. These new rules will have the status of non-binding guidance for firms not currently in scope.   In addition, there are the ongoing consultations and reforms around employee remuneration.

This is unlikely to be the end of the application of the SMCR proposals to all authorised firms. The FCA and PRA are considering extending the SMCR to all financial service firms in 2018. The FCA has estimated that these changes will affect 59,780 (in comparison to 935 firms in March 2016). It is difficult to see how the FCA and PRA will be able to implement the SMCR proposals in their current form to such firms so it seems inevitable that further proposals are to be expected – watch this space!

If you would like to discuss any of the issues raised this article or require any further information or an audit of your policies and procedures to ensure compliance, please contact Claire Holland, senior associate on +44 (0)1392 685254 or email