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1. Summary of requirements
Before making a SMCR Senior Manager appointment or certifying an employee under the SMCR Certification regime, Firms must request a reference – known as regulatory references – from the candidates’ past employers. This will also apply to NEDs who aren’t Senior Managers.
These references will help firms make better-informed decisions about candidates. The requirements build on existing obligations on firms to provide all information relevant to the fit and proper assessment of the hiring firm.
The regulatory reference rules require firms to:
- Request a reference from all previous employers in the past 6 years for people applying for Senior Manager, Certification and non-approved NED roles.
- Share information between SMCR firms in a standard template.
- Disclose certain information going back 6 years. This includes details of any disciplinary action taken due to breaches of the Conduct Rules and any findings that the person was not fit and proper.
- Disclose any other information relevant to assessing whether a candidate is fit and proper (e.g., the number of upheld complaints), covering the previous 6 years (unless it relates to serious misconduct, in which case there is no time limit). Firms will need to use their judgement when considering what is relevant, on a case-by-case basis.
- Retain records of disciplinary and fit and proper findings going back 6 years.
- Not enter into arrangements that conflict with their disclosure obligations (e.g. non-disclosure agreements).
Firms will also need to update regulatory references where new, significant information comes to light and take reasonable steps to provide the current employer with the updated information as soon as reasonably practicable.
Firms do not necessarily need to obtain a new reference each time they renew a certificate under the Certification regime unless there are major changes in the role.
Sole Traders are not required to seek regulatory references on themselves
A Senior Manager will be accountable for the firm’s regulatory reference obligations, as this is part of Prescribed Responsibilities.
The new referencing requirements won’t change when and how a firm decides to take disciplinary action – this is a matter for firms to decide on. The SM&CR doesn’t impose a duty on firms to investigate alleged misconduct by an employee or ex-employee.
Firms will only need to include disciplinary actions that relate to Conduct Rule breaches that occur after the start of the SM&CR.
A firm’s compliance with the regulatory referencing requirements will need to be consistent with firm’s common law duties and other relevant legislation, such as those relating to the rehabilitation of offenders and spent convictions.
2. Requesting the Regulatory Reference
Current and/or previous employers should be asked to disclose all information of which they are aware that they reasonably consider to be relevant to the applicant firm’s assessment of whether the person being considered is fit and proper.
When deciding what information to request a Firm must also have regard to the table in SYSC 22 Annex 2 which includes:
a) Any outstanding liabilities of that person from commission payments
b) Any relevant outstanding or upheld complaint from an eligible complainant against the person
c) The Fitness and Propriety questions in Section 5 of Form A – (Application to perform senior management functions)
d) The main assessment criteria in the FIT Sourcebook – i.e. Honesty, integrity and reputation; Competence and capability; and Financial soundness.
There is no requirement concerning the format that a reference from a non-SMCR firm should take.
If the reference is being requested from an SMCR firm though, they are required to disclose the information in a standard template for regulatory references given by SMCR firms. – see later.
The FCA definition of employer covers more than just a conventional employer and so it may not always be obvious who a person’s employer is. Therefore a firm appointing someone to a position that requires a reference may have to get the employee’s help in identifying their previous employers.
Even if the ex-employer is not a firm, a firm should still take all reasonable steps to try to obtain the reference. However, the FCA accepts that the previous employer may not be willing to give sufficient information.
Firms are required to provide the requested reference “as soon as reasonably practicable”. Regulatory references are not required for internal hires including intra-group hires.
3. Drafting the Regulatory Reference
SMCR Firms must use the template provided by the FCA when giving a regulatory reference
Minor changes may be made to the format of the template provided that the reference includes all the required information.
A firm may include additional material in the reference provided it does not alter the scope of any of the questions in the template.
General Rules and Guidance on giving references
1. Verification
Firms are not required to disclose information that has not been properly verified.
For example, firms are not necessarily required to include in a reference the fact that an ex- employee left while disciplinary proceedings were pending or had started. Including such information is likely to imply that there is cause for concern about the ex-employee but the firm may not have established that the ex-employee was actually responsible for misconduct. However, a firm may include such information in a reference if it wishes to.
2. Accuracy
A firm should, when giving a reference provide as complete a picture of an employee’s conduct record as possible to new employers.
3. Fairness
A firm supplying a reference owes a duty under the general law to its former employee and the recipient firm to exercise due skill and care in the preparation of the reference.
The firm may give frank and honest views, but only after taking reasonable care both as to factual content, and as to the opinions expressed.
References should be true, accurate, fair and based on documented fact.
An example of the general duty is that fairness will normally require a firm to have given an employee an opportunity to comment on information in a reference. The firm might do this through, for example, disciplinary proceedings. This does not mean that the firm should provide an opportunity to comment on the reference itself, as opposed to the allegations on which it is based.
It also does not mean that a firm will be unable to include an allegation in a reference if it has offered the employee an opportunity to comment on the allegation but the employee has unreasonably refused to do so.
A firm may have given the employee an opportunity to comment on allegations at an earlier stage and not necessarily only when preparing the reference.
Where a firm should have given an employee an opportunity to comment on an allegation if the allegation is to be included in a reference, it should give the employee that opportunity rather than merely leave the allegation out of the reference.
Firms are not required to include the employee’s views in the reference. Instead the firm should take those views into account so far as appropriate when deciding whether something should be disclosed and how the disclosure is drafted.
4. Circumstances in which the ex-employee left
The obligation to give a reference for an employee or ex-employee applies however the employment ended or is going to end. For example, it applies whether it ended through resignation, redundancy, dismissal or fixed term work, a secondment or temporary work coming to an end.
5. Missing or incomplete information
If a firm’s records do not cover the maximum periods (usually 6 years) required for regulatory references given by SMCR firms, the firm should note that in the reference.
A firm should not include a warning of the type described as a matter of routine. It should only be included if there is a genuine need to include it.
6. Period for disclosure
In general there is a six year limit on what should be disclosed but this is extended to “at any time” in the case of serious misconduct.
In determining whether something is serious for these purposes, the key question is how important the information still is for the requesting firm’s assessment of the employee’s fitness for the function that they are going to perform.
7. Time in which to respond to reference requests
The FCA expects that normally a firm should issue a reference under this chapter within six weeks of being asked to.
8. Duty to investigate allegations
A firm should, wherever feasible, conclude any investigative procedures before the employee departs.
9. Criminal record checks
A firm giving a reference need not include information from a criminal records check it has carried out. The recruiting firm should carry out a criminal records check itself if necessary.
10. Agreements not to disclose information
A firm must not enter into any arrangements or agreements with any person that limit its ability to disclose information in relation to a regulatory reference.
Additional Rules and Guidance for SMCR Firms
There is some additional guidance in the Handbook – SYSC 22.6, 22.7 – which in brief covers:
1. Omitting or supplementing mandatory disclosures
For example including mitigating circumstances around conduct breaches
2. Requirement to consider whether there has been a conduct breach
Clarification on completing the template in relation to conduct breaches and disciplinary action.
3. Updating references fairly
Clarifying that Verification, Accuracy and Fairness apply to updates.
4. Asking for a reference to be updated
When it may be necessary to ask for a reference obtained previously to be updated e.g. major change of role.
5. When references are to be obtained
There is some flexibility on this. For example, for a new Senior Manager application it can be late in the application process and for an urgent Certification requirement it can be after the event but as soon as reasonably possible.
Groups
A firm recruiting someone from another member of its group is not required to request a reference from the other where the group has centralised records or alternative measures in place to ensure sharing of relevant information between its members.
If they only have access to some of the information they may ask for a reference that only covers the sources to which they do not have such access.
The recruiting firm should be satisfied that the centralised or alternative measures ensure relevant information is made available as part of the fit and proper assessment of the recruit.
4. Updating Regulatory References
Firms have an obligation to update regulatory references if significant new information comes to light.
If a firm (B) has given a reference to another firm (A) about an employee or former employee (P) and later becomes aware of matters or circumstances that would have meant the individual would have received a different reference and would likely influence an assessment of the fitness and propriety of that individual, Firm B will need to:
1. Make reasonable enquiries as to the identity of the individual’s current employer. 2. Provide Firm A with the updated information as soon as reasonably practicable. B does not need to update A if:
(1) A is no longer a firm;
(2) A is no longer P’s employer; or
(3) despite making reasonable enquiries, B does not know whether P is still employed by A.
If B no longer employs P, the obligation to update A ends six years after P ceased to be employed by B.
5. Record-keeping
Firms must arrange for orderly records to be created and kept that are sufficient to enable it to comply with the Regulatory Reference rules requirements and specifically in relation to:
1. An employee’s fitness and propriety
2. Any disciplinary action in relation to breach of conduct rules or fitness and propriety.