The pace of change is swift in financial services regulation. No longer is the regulator the arbiter of fitness and propriety; the senior managers and certification regime (SM & CR) leaves responsibility firmly at the feet of the financial institution. Difficult calls are being made by firms who are required to assess the fitness and propriety of a significant proportion of the people they employ at all stages of the employee life-cycle. Take the offer of employment for example. As in many relationships, at this early stage there is a sense of excitement, a meeting of minds and a promise of what is to come. But looming large is the prospect of the regulatory reference, prescribed in great detail under the Financial Conduct Authority’s new reference regime. What secrets will it uncover? Is there a skeleton in the cupboard?
Firms are uncertain how much detail needs to be given, especially where available information is sketchy and conclusions have not been reached. Should they err on the side of caution and give more detail, appeasing the regulator and alerting the new firm to potential danger? While there are advantages to this approach, it has to be weighed against the impact on the employee in the event that the employment offer is withdrawn (being perceived as a rolling bad apple can have a drastic and career limiting effect on an individual’s future prospects). Or should firms make more limited disclosure and withhold unverified information? The problem with this approach is that, if the individual turns out to be a rolling bad apple and causes significant harm and reputational damage to the firm, a hefty claim in tort for failing to exercise due skill and care in providing the reference may find its way back to the firm.
The FCA points out that common law obligations overlay the regulatory regime, which it is not best placed to give guidance on. By doing so, the FCA has deftly extracted itself from this scenario. Employers must be mindful of the duties they owe to both the employee and the prospective employer and seek to balance the two. Presenting as fair a picture as possible is key. If a disciplinary investigation has been carried out and conclusions fairly reached, that has to be reflected. But what about the situation where the disciplinary investigation hasn’t yet taken place? Or the employee has put forward a different side of the story? Perhaps the issue relates to the individual’s personal life, but could it have a bearing on their fitness and propriety more generally? In each case, the issues need to be considered and reflected fairly, ensuring that the employee’s perspective is put forward. I suspect we will see more detailed narratives in references as employers seek to balance these competing interests. Showing that a fair investigation has been carried out and that the employee has been given an opportunity to put forward his or her case will be key in demonstrating that the duty of care to provide a reference which is true, accurate and fair and not misleading overall, has been complied with.
If the employer fails to strike this balance, they may be on the receiving end of claims by the employee for negligent misstatement, breach of the implied contractual duty of trust and confidence and defamation (the defence of qualified privilege will generally apply in defamation claims where a reference is given in good faith, unless the claimant can prove that the offending statement was made with malice). Similarly, if the new employer suffers loss by the actions of the employee, it may claim against the previous employer for negligent misstatement. So there is a tightrope to walk. This is particularly difficult in the context of the updating obligation under the new regime (which effectively requires the previous employer to send an updated reference if misconduct is uncovered within a period of six years following termination of employment which would have caused the employer to take a different view on its terms). Employers will need to make a number of difficult calls, including what sort of conduct will warrant the review of a reference, how far can (and should) those new issues be investigated, and what involvement will the employee have in that investigation?
Of course it’s not only on appointment that the assessment of fitness and propriety is in focus. The SM & CR requires annual certification of individuals. This means that the assessment process will be ongoing. It will play a significant part in disciplinaries, where mulitple issues of misconduct will call into question the individual’s honesty and integrity, or competence and capability. Many firms have established panels devoted to considering these questions and ensuring a consistent approach is taken. When termination of employment is the outcome, there is the question of how far the firm can go in agreeing settlement terms which impact what the reference will say. Ultimately, the firm’s regulatory obligations under the regime are absolute and nothing in the settlement agreement should inhibit the firm’s freedom to make necessary disclosures. However it will often be prudent to append anticipated reference wording to a settlement agreement (with the right caveats), along with an express waiver of any claims on the part of the employee which might arise as and when that reference is given. This gives some level of comfort to all concerned.
To my mind, the focus has to be on managing the employer’s competing obligations, duties and interests and presenting the fairest possible picture. The consequences of getting it wrong can be severe. Firms are inevitably devoting much time and attention to thinking through these issues and formulating their approach. Only time will tell where the balance will ultimately lie.
