Employed advisers and their managers will need to make sure references are watertight when the Senior Managers Regime is rolled out more widely across the financial services industry.
Another aspect of the Senior Managers Regime, which has come into force this September, is the requirement to prevent the so-called rolling bad apple - the bad employee who moves from firm to firm.
In a bid to improve individual accountability and to tackle bad apples rolling, there are three main sets of rules, which were published by the FCA and the Prudential Regulation Authority (PRA) last year.
These are the Senior Managers Regime (SMR), the Certification Regime and the Conduct Rules.
According to the Financial Conduct Authority (FCA), preparations for the SMR in particular will involve allocating and mapping out responsibilities and preparing statements of responsibilities for individuals carrying out senior management functions.
The FCA guidelines state: “While individuals who fall under this regime will continue to be pre-approved by regulators, firms will also be legally required to ensure they have procedures in place to assess their fitness and propriety before applying for approval and at least annually afterwards.”
Under the new legislation, affected firms will be required to request regulatory references going back six years from former employers of candidates applying for senior insurance management functions.
This aspect of the regime will only impact employees. Appointed representatives will not be included. Gill DavidsonCurrently this applies to functions under the senior insurance managers regime (SIMR) as set out in the Bank of England and Financial Services Act 2016; Financial Conduct Authority (FCA) insurance controlled functions; key function holders and certain executive director roles.
The aim is to ensure that, when recruiting, a firm has all the relevant documentation to hand, dating back six years, to make sure the candidate has a clean track record, no relevant disciplinary or regulatory black marks and is indeed considered to be a fit and proper person to hire.
Keith Richards, chief executive of the Personal Finance Society (PFS), comments: “The reference must contain given information including details of regulated functions held by the candidate, their specific roles and responsibilities.
“Of particular importance is the need to include significant detail around cases where the firm has concluded the employee breached the regulator’s conduct rules or when they were not fit and proper to perform a function.”
He believes in some cases, the new rules will help to “drive up standards of conduct and help to limit future bad behaviour within the sector”.
However, he adds: “It will also introduce an additional layer of administration and cost to the hiring process.
“It is critical for firms to dedicate the resources required to undertake proper due diligence on new hires who may have a history of misconduct, but it must be said most firms already adopt a robust recruiting process.”
| Improving accountability: Three sets of rules | |
| The Senior Managers Regime | This focuses on individuals who hold key roles and responsibilities in relevant firms. Preparations for the new regime will involve allocating and mapping out responsibilities and preparing statements of responsibilities for individuals carrying out senior management functions. While individuals who fall under this regime will continue to be pre-approved by regulators, firms will also be legally required to ensure that they have procedures in place to assess their fitness and propriety before applying for approval and at least annually afterwards. |
| The Certification Regime | This applies to other staff who could pose a risk of significant harm to the firm or any of its customers (for example, staff who give investment advice or submit to benchmarks). These staff will not be pre-approved by regulators and firms’ preparations will need to include putting in place procedures for assessing for themselves the fitness and propriety of staff, for which they will be accountable to the regulators. These preparations will be important not only when recruiting for roles that come under the Certification Regime but when reassessing each year the fitness and propriety of staff who are subject to the regime. |
| The Conduct Rules | These set out a basic standard for behaviour all those covered by the new regimes will be expected meet. Firms’ preparations will need to include ensuring staff who will be subject to the new rules are aware of the conduct rules and how they apply to them. Individuals subject to either the SMR or the Certification Regime will be subject to Conduct Rules from the commencement of the new regime on 7th March 2016, while firms will have a year after commencement to prepare for the wider application of the Conduct Rules to other staff. |
While this does not as yet apply to advisory firms, the regulator will be looking to roll something similar out across the whole financial services industry within the next two years, to ensure that advice firms do not hire a potential ‘bad apple’.
As the adage goes, one bad apple spoils the barrel, which is why there will be a minimum of information required in references.
Arpita Dutt, partner at Brahams Dutt Badrick French, comments: “The reference would have to contain uncontroversial information such as details of regulated functions held by the candidate and their responsibilities and details of any other roles performed by them at the same firm over the past six years.
“More controversially, if the firm had concluded the employee had breached the regulator’s conduct rules, or that they are not a fit and proper person to perform a function, this would also have to be included in the reference.
“It would need to give a description of any internal disciplinary procedures taken as a result of the firm having reached those conclusions, including the basis for the procedure, the outcome and the disciplinary sanction applied.
“The proposed rules set out the minimum information to be included - they do not prevent the firm giving the reference from saying more.”
For advisers who are part of a network or appointed representatives of a national advisory firm, this will not be an issue.
According to Gill Davidson, group regulatory director for Tenet: “This aspect of the regime will only impact employees. Appointed representatives will not be included.”
However, there is little guidance given on what to do if the former employer has a prejudicial view of the person leaving, and giving a reference that might have an unfairly prejudiced effect on that individual’s future career.
For non-network member advice firms, the rule changes will eventually apply to them, but as the PFS's Mr Richards comments, the majority of advisers have always been diligent when hiring.
He says: “For most advice firms, the new rules will not result in significant changes as they have always taken great care and due diligence to employ the right people into their business.”
