On 27 January 2022, the Financial Conduct Authority (FCA) published guidance clarifying some key points about regulatory references under the Senior Managers and Certification Regime (SMCR).
What is a regulatory reference?
Regulatory references are employment references provided about certain employees working in a firm or seeking to work in a firm authorised by the FCA and the Prudential Regulation Authority (PRA). These are required when an in-scope employee changes roles within a firm or moves to another firm. Banks, building societies, insurers and other financial services are required to obtain references covering six years of a candidate’s employment and keep track of previous references provided, so these can be updated should further information become known. The regulatory references assist firms when assessing a candidate’s fitness and propriety in consideration for certain roles. These are heavily relied upon and therefore central to the financial service sector’s recruitment practice.
Who needs a regulatory reference?
A regulatory reference is required when an individual is applying for or moving into a Senior Management or Certification Function (or a non-approved Non-Executive Director) in an SMCR firm.
What are the rules and what are the new clarifications?
The key elements of the regulatory references regime are as follows:
Requesting and providing references
Firms seeking to appoint an individual into one of the relevant roles/functions mentioned above are required to obtain from the individual’s previous employer(s) a regulatory reference dating back six years. This rule applies regardless of whether the previous employer is regulated or outside the UK. Similarly, firms are required to provide references for current or former employees – this is regardless of how the employment ended (e.g. dismissal, resignation, redundancy, etc.)
References should be provided as soon as reasonably practical and within six weeks of the request, as set out by the FCA. The FCA has clarified this is a limit, not a target. Firms only need to take reasonable steps to obtain regulatory references. If firms incur difficulties obtaining a regulatory reference, they are encouraged to inform the FCA and set out the steps they have taken.
Disclosing relevant information
Following receipt of a request for a regulated reference, the following must be provided (as a minimum):
- details of any certification function, SMF, notified NED or credit union NED role performed by the individual, and summary of what the role involved;
- details of any other roles performed at the firm or at any firms within the same group, in the last six years;
- where the firm has concluded at any point in the six years prior to a reference request that the candidate breached any of the FCA or PRA conduct rules, or a conduct standard that they were required to observe, and the facts that led the firm to that conclusion;
- confirmation if the individual was held not fit and proper to perform a function and the facts that led the firm to that conclusion; and
- details of the basis and outcome of any disciplinary action as a result of the previous two points.
SMCR firms are required to use the template set out in Annex 1 to SYSC 22 when providing a regulatory reference. The purpose of the templates is to ensure consistency across the board.
The FCA’s recent guidance provides that firms must ensure the template is complete and the information provided is accurate before sending it. Failure to use the correct template or sending incorrect information inevitably leads to delays.
Firms have an ongoing obligation to update regulatory references provided in the preceding six years, should information become known that would change the reference if drafted at present. For example, the previous employer becomes aware of a misconduct allegation that would cast a shadow on the individual’s fitness and propriety. The updating requirement is required when the current employer is authorised under the Financial Services and Markets Act 2000 and the individual is known to still work there (reasonable enquiries are required to confirm this).
The FCA has provided further guidance: regulatory references are to be assessed on a case-by-case basis and individuals should not be automatically rejected due to a qualification in their references. In addition, firms should not have a quota for the number of qualified references they will accept.
The clarifications provided by the FCA respond to common challenges firms experience when obtaining references, which predominantly seem to concern delays in obtaining them and consistency in quality of those received. The FCA reminds firms that timely, good quality references are in everyone’s interests.