Regulatory references Further food for thought November 2016
Regulatory references Further food for thought November 2016 Getting ready At the end of September 2016, the FCA and the PRA published their long-awaited final rules relating to regulatory references. Despite considerable pushback from the industry, the regulators stuck to their guns on most of their key proposals. It was therefore very useful to sit down with some of our clients to discuss how they are preparing for the new rules on regulatory references coming into force on 7 March 2017, as well as some of the practical challenges we consider that firms will face in practice. This paper summarises a number of the discussion points that arose in relation to regulatory references. No doubt, there will be many more over the coming months as firms prepare to request and provide new style regulatory references. We plan to hold a further dinner next year to mark the first anniversary of the Senior Managers and Certification Regime going live to provide clients with an opportunity to discuss with peers how they have found their first year under the new regime. DON T HOLD BACK In the meantime, please don t hold back with sending us your thoughts or queries we remain very happy to share our market and regulatory knowledge with you and by keeping the dialogue open, we can help to ensure that you and your peers stay informed and ahead of the market. Allen & Overy LLP 2016
Food for thought Compliance before 7 March 2017? While some firms considered trying to comply with the new regulatory reference rules prior to 7 March 2017 early on, ultimately firms seem to have decided that it is unlikely that they will be in a position to comply until March next year. But this has not seemed to stop some firms from already requesting more detailed information in recent requests for regulatory references. In addition, given that there is no obligation to comply in advance of 7 March 2017, firms were also mindful of employee reaction and potential exposure if they did disclose more information about an employee s conduct than they are strictly required to at present. The fact that new regulatory references will not come into effect until next year means that firms will have to wait a bit longer for the current lacuna in employee checks to be filled. In the meantime, firms are relying on background screening checks and self-attestations from existing employees and new hires to plug the information gap. Who owns regulatory references? References have traditionally fallen under the HR domain. Primary responsibility for new style regulatory references seems likely to remain with HR in most firms. However, it is going to be increasingly important for Legal and Compliance to get their hands dirty, especially where issues may need to be flagged in references. The right of reply For current employees, most firms have already built a right of reply in relation to allegations made into their existing processes. However, things are expected to get trickier when dealing with former employees and how the right of reply will operate if a regulatory reference given in relation to a former employee needs to be updated. The consensus was that a pragmatic approach would be taken, where allegations are set out in writing and the individual is simply given a designated window within which to provide any responses to the allegations, before a decision is taken by the firm. However, this approach may not work in all circumstances. For example, if there are specific reasons as to why a firm does not want to disclose the nature of allegations, or commit those allegations to writing in a non-privileged document. Updating regulatory references We have already covered systems and controls, as well as the right of reply all of which will be important for firms to be able to effectively update regulatory references, if and when required. Most firms thought that instances where they would have to update a regulatory reference would be quite few and far between, based on previous issues. However, recent matters (such as LIBOR and FX) reminded us how sometimes significant issues can go undiscovered for a number of years, by which point employees have often moved on to one or multiple new employers. However, if a regulatory reference does need to be updated, firms are still considering how they might track down a former employee s current employer, especially given that the Financial Services Register is no longer maintained for anyone other than Senior Managers. Searching for the employee on the internet was one option floated by firms, but this approach may not be straightforward for former employees with common names or due to the potential unreliability of information obtained from the internet.
Integration with existing processes Whether issues start with Legal, Compliance, HR or another part of the business, it is important that the impact issues may have on regulatory references (whether new or updated references) is not overlooked. Decisions about Conduct Rule breaches and fitness and propriety issues cannot be taken lightly. They can have serious knock-on effects when it comes to drafting a regulatory reference for a departing or former employee. Our discussions showed that firms are giving careful thought to these issues and remain alive to the consequences and potential legal risks that providing regulatory references will give rise to. However, firms remain mindful of the need to balance carefully employment law considerations with the requirements and expectations of the regulators. Firms appear to be intending to make tweaks or minor amendments to their current processes in order to include the new requirements relating to regulatory references. Many firms also seem to be intending to stress test their arrangements in advance of next March (e.g. using previous examples of conduct issues) in order to ensure that what new controls and processes they put in place are fit for purpose. No longer a negotiating chip Most firms have been wary for a number of years about agreeing old style regulatory references with departing employees. Many claimant employment lawyers see new regulatory references as upping the stakes when it comes to agreeing regulatory references up front, and think that there will be more room for negotiations as to the contents of new style regulatory references. As is the case with current regulatory references, firms will resist these attempts to negotiate new style regulatory references, and may not even to be willing to enter into any sort of negotiations with departing employees as to what may be said about them in a future regulatory reference for fear of fettering their discretion to provide and, if necessary, update regulatory references in the future.
CONTACTS Sarah Henchoz Partner Tel +44 20 3088 4810 sarah.henchoz@ Louise Skinner Counsel Tel +44 20 3088 2083 louise.skinner@ David Cummings Senior Associate Tel +44 20 3088 4427 david.cummings@ Robbie Sinclair Senior Associate Tel +44 20 3088 4168 robbie.sinclair@ Calum Burnet Partner Tel +44 20 3088 3736 calum.burnett@ Sarah Hitchins Senior Associate Tel +44 20 3088 3948 sarah.hitchins@ Sheila Fahy PSL Counsel Tel +44 20 3088 3681 sheila.fahy@
FOR MORE INFORMATION, PLEASE CONTACT: London Allen & Overy LLP One Bishops Square London E1 6AD United Kingdom Tel +44 20 3088 0000 Fax +44 20 3088 0088 GLOBAL PRESENCE Allen & Overy is an international legal practice with approximately 5,200 people, including some 530 partners, working in 44 offices worldwide. Allen & Overy LLP or an affiliated undertaking has an office in each of: Abu Dhabi Amsterdam Bucharest (associated office) Budapest Ho Chi Minh City Hong Kong Moscow Munich Seoul Shanghai Antwerp Casablanca Istanbul New York Singapore Bangkok Barcelona Doha Dubai Jakarta (associated office) Johannesburg Paris Perth Sydney Tokyo Beijing Düsseldorf London Prague Warsaw Belfast Bratislava Frankfurt Hamburg Luxembourg Madrid Riyadh (cooperation office) Rome Washington, D.C. Yangon Brussels Hanoi Milan São Paulo Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP s affiliated undertakings. Allen & Overy LLP 2016 CS1611_CDD-46721_ADD-63926