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The High Court has clarified the scope of an employer’s duty when giving a reference in respect of a former employee.

The law provides that an employer must exercise reasonable skill and care to provide a reference which is true, accurate and fair. If it fails to do so, then the former employee may have a claim against the ex-employer for negligent misstatement. The High Court has ruled on how far the employer’s duty extends.

This case concerned Mr Hincks, an independent financial advisor, who was employed by CIFS but had authority to conducted FCA-regulated activities as the appointed representative for Sense Network. Following Sense Network’s internal investigation into alleged breaches of its pre-approval processes, it terminated Mr Hincks’ authority on the basis that he had committed repeat breaches and had been “malicious” in doing so. Mr Hincks’ conduct meant that Sense Network had to offer over £12,000 in compensation to its clients. Mr Hincks later sought a reference from Sense Network. The reference provided referred to the allegations, the investigation, the compensation paid to clients, and Sense Network’s conclusion that he had “knowingly and deliberately circumvented” the pre-approval process.

Mr Hincks brought a claim for negligent misstatement, arguing that Sense Network’s reference had not been true and accurate. He said that the investigation had been an “inadequate sham”, and that it had been negligent of Sense Network to report its opinions arising from the investigation without having checked that it had been procedurally fair.

The High Court held that a reference-giver relying on the findings of a previous investigation is not required to review the procedural fairness of that investigation. Instead, the inquiry should be into whether the investigation had a proper and legitimate basis; if it did, reliance upon it was reasonable. A more stringent review may only be appropriate if there was some ‘red flag’ suggesting that something had been amiss with the investigation.

Many employers tend to give factual references, but for those who do not, this case helps to demonstrate what is included within the duty of care they are under. Additionally, where the employer is under regulatory duties to provide particular information to a prospective employer, then it must do so by reference to all information and documentation available to it.

Hincks v Sense Network Ltd [2018] EWHC 533 (QB)

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SMCR extension: now is the time for firms to prepare

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Following the FCA’s publication of its proposed extension of the Senior Managers & Certification Regime (SMCR) to include all financial services firms from 2018 (read more here), and the recent report highlighting the increase in FCA fines against individuals (read more here), now is the time for affected firms to take active steps in preparation.

The SMCR pervades many aspects of the employment relationship, from recruitment, to training, management, promotion and, if relevant, disciplinary and dismissal. Firms will need to:

• Produce and agree statements of responsibility;
• Review their employment contracts:
  • checking the terms allow them to impose necessary responsibilities on senior managers;
  • checking that they make the appropriate references to the need to comply with regulatory requirements under sanction of disciplinary action/dismissal; and
  • add requirements for advance FCA approval to be obtained and maintained in the case of senior managers, and for certification to be obtained and maintained in the case of those in certification functions;
• Give training to employees on the FCA’s Conduct Rules that will apply on an individual basis and ensure that staff handbook and compliance manuals reflect them. At a high level, the rules are:
  • 1: to act with integrity;
  • 2: to act with due skill care and diligence;
  • 3: to be open and cooperative with the FCA, PRA and other regulators;
  • 4: to pay due regard to the interests of customers and treat them fairly; and
  • 5: to observe proper standards of market conduct;
• Give training on the additional Conduct Rules that will apply to the employees the firm designates as senior managers;
• Consider offering those staff who are earmarked for senior manager roles the opportunity to obtain independent legal advice on their statements of responsibility and additional duties;
• Adapt their appraisal and disciplinary processes to ensure that any breaches of the Conduct Rules are identified, fed into the certification process, and where necessary are notified;
• Implement processes and procedures for the annual assessment and certification of fitness and propriety of employees carrying out certification functions;
• In their processes for giving references to new employers, build in compliance with the obligations to give regulatory references, and information relating to matters concerning the individual’s fitness and propriety; and
• Consider the application and consequences of the new rules when settlement agreements are being entered into with affected staff, particularly if there have been conduct or capability issues.

If you need help with any of the issues referenced in this article, please contact Nick.

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FCA consults on extending Senior Managers and Certification Regime

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The Financial Conduct Authority has finally published its proposals for the extension of the Senior Managers and Certification Regime (or “SMCR”) that currently applies only in banks and other deposit takers to most FCA regulated entities who are not already covered by it.

There is no firm implementation date for the new rules but this is still expected to be in 2018. The proposals remain subject to further consultation and change until 3 November 2017 (and responses to the consultation can be submitted via the link below before then). Nevertheless, the current proposals do give a clearer flavour of how the rules will be rolled out and it would be a brave employer who waits for the final version to start the significant preparations likely to be needed.

Obviously this is a compliance-led issue that will have wide-ranging affect on in-scope business. However, several of the key changes fall within the employment arena and will impact on HR processes. These will take some time to put in place and we recommend that employers start making preparations now if they have not already done so.

Key points to note are that all firms caught by the revised rules (other than limited scope firms) will have to:

• introduce a responsibility map showing who in the company is responsible for various key areas (including certain mandatory responsibilities that must be allocated to someone);
• introduce individual statements of responsibility for Senior Managers, who will be personally liable if they fail to take reasonable steps to prevent or stop an FCA breach in the areas of the business for which they are responsible;
• annually certify a broad category of staff in “certification functions” as “fit and proper”;
• consider whether any performance or misconduct issues that arise breach any of the applicable FCA conduct rules (a sub-set of which will be applied to a much broader category of staff than currently), which cover matters such as the individual’s integrity, and whether they meet standards of due skill, care and diligence, and of market conduct. If the conduct rules are breached, this may require a report to the FCA, and for those in certified functions, may affect the ability of the firm to continue to certify that person as fit and proper and therefore affect the firm’s ability to continue to employ them;
• tell their staff that the conduct rules apply to them and train them on those rules; and
• comply with the enhanced rules on regulatory references that came into effect for banks earlier this year. Where for example there has been a breach by an individual of the conduct rules and disciplinary action has been taken, the firm will have to notify a prospective employer of the individual of that fact and provide details in the regulatory reference.

Additional “enhanced” requirements will also apply to a small sub-set of firms.

On the employment side specifically, HR teams in affected businesses need to start thinking about:

• producing and agreeing (or imposing) statements of responsibility;
• checking whether contracts of employment allow the imposition of necessary responsibilities on current Senior Managers (and changing templates to ensure that they do so in the future) – as one might expect, our experience is that statements of responsibility are hotly negotiated;
• ensuring employment contracts make appropriate references to the need to comply with regulatory requirements under sanction of dismissal, to the requirement for advance FCA approval being obtained and maintained for Senior Managers and for certification being obtained and maintained for Certification Functions;
• including provisions relating to the expanded conduct rules into compliance manuals/staff handbooks;
• setting up processes to annually assess and certify staff in Certification Functions;
• amending processes for appraisals/disciplinary issues to ensure that FCA conduct rules breaches are identified and, where necessary, notified as well as being fed into the certification process; and
• considering application of the new rules when entering into settlement agreements with affected staff, particularly when they have been disciplined for a conduct or capability reason.

The consultation paper can be accessed here.

If you need help with any of the issues referenced in this article, please contact Nick.

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Regulatory reference rules now in force under senior managers regimes

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As of 7 March 2017, many executives working in banking and insurance now come within the scope of the new regulatory rules relating to references. Although the full regime has only now come into force, this regulatory development has already had a palpable effect on the employer-to-employee relationship in those sectors.

Background

For context, the rules form part of the senior managers regimes, introduced by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) in March 2016 in response to the global financial crisis and a desire to more closely regulate the conduct of individuals.

The senior managers regimes are known in banking as the Senior Managers and Certification Regime (SM&CR) and in insurance as the Senior Insurance Managers Regime (SIMR). They are underpinned by the recommendations of the Parliamentary Commission on Banking Standards, which consulted and reported on professional standards and culture in the UK banking sector, and by the subsequent Financial Services (Banking Reform) Act 2013.

In 2013, in the wake of the Libor and FX-rigging scandals that have featured regularly in the news, the Bank of England’s ‘Fair and Effective Markets Review’ made further recommendations aimed at raising individuals’ conduct standards, including that the FCA and PRA should consult on a compulsory form of regulatory reference.

The new rules are the culmination of this, and have among their aims the identification and prevention of the ‘rolling bad apple’ – the individual who moves from employer to employer to avoid their conduct history from catching up with them.

What do the new rules require?

The full rules are intended by regulators to be a key tool in enabling firms to share relevant information to support their assessment of candidates’ fitness and propriety. These are those who are candidates for senior management functions, significant harm functions, senior insurance management functions, controlled functions, key function holders and notified non-executive directors.

• The new rules contain a mandatory form of standard reference, which specifies information that must be included. In addition to identifying the individual, it must include:
• whether they performed a significant harm function or had been an approved person at the firm;
• whether they were in a specified role, such as a key function holder or notified non-executive director;
• whether any disciplinary action was taken against them that amounted to a breach of an individual conduct requirement, such as the Conduct Rules, or breaches under the Statements of Principle and Code of Practice for Approved Persons, or that is relevant to the individual’s lack of fitness and propriety to perform a function. ‘Disciplinary action’ means the issuing of a formal written warning, suspension or dismissal of a person, or reduction or recovery (‘clawback’) of their remuneration;
• a factual description of the breach including dates, the basis for disciplinary action and its outcome. Firms are not obliged to include information that has not been properly verified;
• any information that may be relevant to the assessment of whether the individual is fit and proper.

The hiring firm must take reasonable steps to obtain regulatory references from past employers going back six years from the date of the reference request. There is no time limit for misconduct that is serious, and so a firm giving a reference must check whether there was any serious misconduct at any point and, if so, disclose it in the reference.

A firm also has a duty to update a regulatory reference it sent previously to an individual’s employer where misconduct comes to light after the employee’s departure. It must do so for a period of six years from the date the individual left the firm where it becomes aware of matters which, if it were drafting the reference now, would cause it to write it differently.

The practical effects

Along with other features of the senior managers regimes, such as certification, these new rules are part of the shifting of responsibility for verifying individuals’ fitness and propriety from the regulator to the firms.

Although implementation of the new rules was delayed for a year to March 2017, preparation for their entry into force, combined with the changes already brought about by those parts of the senior managers regime introduced a year ago, has already had an important and tangible bearing on the employment relationship for those working at affected firms.

Individuals’ behaviour and conduct histories are now being scrutinised like never before. Recently detected conduct issues that may have otherwise passed unadmonished and past conduct that did, are being picked up and used to form the basis for disciplinary processes and investigations of fitness and propriety.

There has been an emphatic hardening of employers’ attitudes to the pursuit of such matters and away from resolving them. In great part this must be attributed to firms wanting to ensure their regulatory compliance, but in some cases there is also a notable zeal on the part of those conducting the processes and making the decisions. It is not always the case that firms take a fair and impartial approach to investigating and disciplining individuals and, if anything, some firms are adopting a more obviously adversarial approach than before.

Furthermore, the rules are clear that a firm must not enter into an arrangement or agreement that limits its ability to make regulatory reference disclosures. In other words, a firm is precluded from agreeing or limiting what it will say about an individual in a regulatory reference by terms agreed in a settlement agreement or a COT3. The FCA’s guidance to the rules states: ‘A firm should not give any undertakings to supress or omit relevant information in order to secure a negotiated release.’ Any such agreement or arrangement will be void.

Where an employee’s future career is at risk, not only at that firm but also within their chosen area of financial services, the stakes for the individual could not be higher.

The unsurprising consequence of this hardening in positions is that disputes between employers and employees over alleged misconduct are being fought harder and for longer. An employee who faces a disciplinary sanction that threatens to end their career has little option but to challenge it forcefully, if only to influence what lies on the firm’s record when regulatory references are compiled in future.

It remains the case that employers have common law duties when providing a reference, including that a reference provided must be true, accurate and fair, and not give misleading information. Satellite litigation is bound to be created where regulatory references are not so compiled.

What does the future hold?

The senior managers regimes currently apply to deposit takers and investment firms, that is to say banks, and Solvency II firms and large non-directive insurers, that is to say insurers. For the present, this does not include insurance brokers.

However, the Government is proposing that, from 2018, the regime will be extended to the wider financial services industry, replacing the Approved Persons Regime. It is understood that this would bring approximately 60,000 more firms within its scope, meaning that it would apply to asset managers, private equity firms, inter-dealer brokers and other types of broker. As with banks and insurers, the impact for those firms and their employees is difficult to over-estimate.

Nick Wilcox, Senior Associate

A variation of this article appeared in the ELA Briefing Vol. 24

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FCA and PRA publish first set of rules on regulatory references

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A joint policy statement was published by the PRA and the FCA on 15 February 2016 in relation to the implementation of the new senior managers and certification regime (SMCR), the senior insurance managers regime (SIMR) and the PRA requirement on regulatory references, most of which came into effect on 7 March.

The joint policy statement contains the final rules in relation to the application of the SIMR to Swiss insurers, as well as a first set of rules in relation to regulatory references, which will be implemented at a later date.

An earlier consultation in October 2015 raised some concerns that the FCA and PRA wished to consider further. Thus, only certain provisions came into force on 7 March 2016; namely, the requirement for PRA approved firms to provide a reference to new employers as soon as reasonably practicable in respect of those exercising particular functions, and the requirement to obtain references for candidates in relation to the past five years of their employment and/or holding of non-executive directorships.

Currently, there is no set template for regulatory references; the FCA plans to publish the final set of rules some time around summer 2016.

Strengthening accountability in banking and insurance: Implementation of SM&CR and SIMR; and PRA requirements on regulatory references, Policy Statement PRAPS5/16, FCAPS16/5

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Negative reference can be discriminatory regardless of referee’s motive

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The EAT has found that it is not necessary to show a referee’s motive when bringing a disability discrimination claim following a negative reference, which is based partly on an individual’s frequent absences.

Ms Pnaiser was employed by Coventry City Council. She had a disability which resulted in some significant absences from work. In July 2013, she was offered a job with NHS England subject to satisfactory references. In responding to the reference request, Ms Pnaiser’s former manager, Ms Tennant, sent a written reference which had been agreed in a settlement agreement, but she invited the recruiting manager to discuss the reference further by telephone. During the conversation, Ms Tennant stated that Ms Pnaiser’s frequent absences had impacted her performance at work. As a result of this discussion, the offer of employment was withdrawn, and Ms Pnaiser brought a claim against NHS England and Coventry City Council alleging disability discrimination.

The EAT found that the correct approach is to consider whether mentioning Ms Pnaiser’s absences as part of a wider discussion about performance could be discriminatory regardless of Ms Tennant’s motives. The EAT found that there was sufficient evidence to show that the absences had been at least part of the reason for the negative reference, and it was for NHS England to show that the absences and performance assessment played no part in the withdrawal of the job offer.

This decision puts employers in a tricky situation in relation to references. Certainly if there has been an agreed reference it would be wiser not to volunteer further information. It also reminds employers who are recruiting that claims can arise as a consequence of acting on a reference which is potentially discriminatory.

Pnaiser v NHS England and Coventry City Council UKEAT/0137/12

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FCA and PRA publish proposals on new regulatory references

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As part of the wider move towards greater accountability in the financial and insurance sectors, and ahead of the new Senior Managers regime coming into effect in March 2016, a joint consultation paper on regulatory references was issued by the PRA and the FCA on 6 October 2015.

The consultation paper proposes changes to references provided in relation to individuals performing certain functions, including but not restricted to those concerned by the Senior Managers regime. It will also apply to individuals performing controlled functions in the insurance sector, as well as some Non-Executive Directors.

Proposals include a requirement to include breaches of the FCA conduct rules, where applicable, going back 6 years. Referees will be required to make a positive affirmation where there is no such information to disclose.

These additional requirements seek to enable employers in financial services and the insurance sector to make a fully informed decision in the recruitment process. It is also significant for referees, as past employers will have to exercise diligence in providing the references. Interestingly, the proposals also specify that firms should not enter into agreements limiting their ability to disclose relevant information, which will no doubt affect settlement negotiations in the sectors.

The PRA and FCA are inviting comments on the proposal until 7 December 2015, and intend to publish a finalised policy statement in early 2016.

Consultation Paper FCA CP15/31 PRA CP36/15, Strengthening accountability in banking and insurance: regulatory references

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Disclaimers at end of references work

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In this complicated case concerning the giving of references in the public sector, the High Court has made a determination of an important point of principle of general application, namely that a disclaimer at the end of a reference purporting to absolve the giver of the reference from legal liability with respect to the recipient is effective. For some years, this had been in doubt.

It was always good practice to put disclaimers on the end of references. Now they have been held to work, this should be a universal approach.

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