FSA consults on referencing for Approved Persons

The FSA is currently consulting the industry on several issues that affect how you deal with regulated references as well as how you recruit significant influence functions individuals (SIFs) – CP10/3 January 26, 2010

This paper is of particular interest to those of you involved in recruiting employees for controlled functions and in overseeing, developing and administering processes for complying with the FSA’s approved persons regime.

You can send your comment to the FSA by 28 April 2010. The FSA will finalise the proposals and aim to publish the final rules in a policy statement during the third quarter of 2010.

You can read the whole paper at: http://www.fsa.gov.uk/pubs/cp/cp10_03.pdf

Below are some highlights on what is proposed:

Clarification of our position on ‘compromise agreements’

3.20 We propose to amend the Supervision manual (SUP 10) to give further guidance on our rules that require firms to disclose information where an individual is suspected of doing something that may result in dismissal, or resigns while under investigation by the firm, or there are issues that may affect our assessment of the individual’s fitness and propriety to be able to perform a controlled function.

3.21 Occasionally, firms or candidates will cite confidentiality clauses in a ‘compromise agreement’ as a reason for not providing relevant information regarding the circumstances of an employee’s departure from their previous employment.

3.22 In our view, the requirements of our principles and rules override any duty of confidentiality entered into between a firm and its employee. We therefore propose to add guidance to our rules to clarify this.

4.6 The onus is on the firm to provide sufficient information in the application process to satisfy us that they have fully assessed the candidate and can confirm that they are fit and proper under section 61 of FSMA. Failure to do so can represent for us an important indicator of the quality of the firm’s systems and controls for recruitment, and persistent failures to provide robust information in support of applications may result in us taking further supervisory action.

4.7 The type of information that will help us to make our approval decision includes details of the:

• responsibilities that the role involves and the competences that it requires;
• recruitment, referencing, interview and appointment processes;
• due diligence undertaken by the firm to ensure the candidate is fit and proper; and
• firm’s rationale for concluding that the candidate is fit and proper to perform the role in question, including an assessment of the competence of the candidate and information about any action to be taken post-appointment to address any developmental gaps or training needs that have been identified.

It may also include supporting documentation or reports from third parties, such as head-hunter or other similar reports.

4.8 In 2008 we made changes to Section 6 of the application form (Form A), which now asks firms to provide details of the due diligence undertaken on the candidate. During 2010, we intend to make further changes to this section of the application form to remind firms to supply the above information where appropriate.

4.9 Where firms can demonstrate they have undertaken appropriate due diligence this may remove the need for us to conduct an interview.

4.10 Firms will also note, in relation to ‘referencing’:

• our proposal on ‘compromise agreements’ outlined in paragraphs 3.20 to 3.22; and
• our intention to provide guidance to clarify that the requirement upon firms to provide information on ex-employees who performed controlled functions for them overrides any confidentiality provision they may have agreed with their ex-employee.

4.12 To further assist firms in managing the time pressures that may arise when submitting applications that may involve an interview, firms can submit applications before they have fully completed their own due diligence checks (e.g. Criminal Records Bureau and/or credit checks outstanding). In these instances, firms must use Section 6 of the application form to detail the due diligence checks they have already performed on the candidate before submission, and those that are outstanding (which will be completed by the firm before appointment). This will allow us to take the process forward, but we will expect firms to provide supplementary information about the outcomes of their final checks before final approval can be granted.

10.13.
7A
G The obligations to supply information to the FSA under SUP 10.13.7 R
apply notwithstanding any agreement or any other arrangements entered into
by a firm and an employee upon termination of the employee’s employment.
A firm should not enter into any such arrangements or agreements that could
conflict with its obligations under this section. Failing to disclose relevant
information to the FSA may be a criminal offence under section 398 of the
Act.