With an eye toward addressing the many complex issues inherent in the preparation and consideration of regulatory references, the UK Banking Standards Board has prepared draft guidance for firms that focuses on three principles: fairness, proportionality, and consistency.
On 30 January 2019, the UK Banking Standards Board (BSB), a private sector body open to all UK operating banks and building societies, launched a consultation in recognition of the difficulties firms face in relation to the regulatory references requirement under the Certification Regime (which forms part of the Senior Manager and Certification Regime (SMCR)).
The purpose of a regulatory reference is to provide firms recruiting individuals into certified roles, senior management functions, or notified nonexecutive director positions with information relevant to the assessment of that person’s fitness and propriety for the role, which they might not otherwise obtain through the recruitment process. The regulatory references regime is intended to reduce the risk of financial, legal, and reputational damage individuals with a history of misconduct can cause to firms and the industry.
Firms are required to perform three roles in respect of regulatory references:
In its consultation paper, the BSB explains that in implementing the regulatory reference requirement, firms must balance a range of significant considerations. These relate to legal and regulatory obligations (such as employment law, data protection, and the requirement to provide information to other firms regarding fitness and propriety), but also to more general ethical principles of transparency of process, given the impact references may have on an individual’s career and reputation.
The BSB identifies three key challenges that firms face:
Consequently, the BSB, in pooling its members’ knowledge via the BSB’s cross-industry certification regime working group, has put together draft guidance in the form of a statement of good practice. The guidance is intended to be nonbinding and focuses on the three principles of fairness, proportionality, and consistency. In particular, it covers good practice when providing and obtaining regulatory references, and the type of information to include in a reference.
Employers which have been in scope of the regulatory references requirements since they were introduced in March 2017 have experienced a number of pinch points which the draft guidance seeks to address. Two significant issues identified in the draft guidance include the steps that should be taken in relation to regulatory references where the individual has resigned and a disciplinary procedure has not been completed, and where new information comes to light after a regulatory reference has been issued.
In the case of incomplete disciplinary procedures, the draft guidance suggests that where there is evidence of wrongdoing that would have been pursued through further investigation or disciplinary proceedings, a firm should consider referring to this evidence and the fact that it was unable to complete the investigation or initiate disciplinary proceedings before the individual left.
In relation to updating regulatory references after new information is discovered, the draft guidance notes that revisions will only be required for a minority of references where a new allegation or new information has come to light or a disciplinary appeal has been concluded. The draft guidance suggests that firms should contact the former employee (via multiple methods) and provide a reasonable timeframe (at least 15 working days) for the individual to respond to the allegation before the firm updates the reference.
Firms may also consider providing a “leaver’s pack” with details of the regulatory reference procedures and a request that individuals keep their contact details up to date. The draft guidance reminds firms to verify the identity of the current employer to ensure that no data protection breach occurs by releasing personal information to a firm that no longer employs the individual. The draft guidance confirms that the threshold for disclosing issues in a revised reference should be the same as for an initial reference.
By addressing the many complex issues inherent in the preparation and consideration of regulatory references, the BSB hopes its guidance will assist firms and help raise the standards of behaviour and competence in banking through the effective assessment of fitness and propriety.
The deadline for consultation responses is 20 March 2019. View the full guidance and consultation paper.
If you have any questions or would like more information on the issues discussed in this Lawflash, please contact any of the following Morgan Lewis lawyers:
London
Louise Skinner
Matthew Howse