The Hong Kong Monetary Authority (HKMA) announced its endorsement of the Guidelines on the Mandatory Reference Checking Scheme (respectively, Guidelines and MRC Scheme) issued by the Hong Kong Association of Banks and the DTC Association – just one year after issuing the Consultation Conclusions Paper (covered in our previous bulletin).
The MRC Scheme has been launched as an effort to curb the “rolling bad apples” phenomenon in the banking sector in Hong Kong, by enhancing the disclosure of the employment history of prospective employees taking up regulated roles among authorised institutions (AIs). The MRC Scheme will be launched in two phases, and AIs are given 12 months (ie. up to 2 May 2023) to put in place the necessary internal controls, policies and procedures, for the implementation of Phase 1 of the MRC Scheme (Phase 1).
Scope of Phase 1
Phase 1 covers the following senior management positions within AIs in Hong Kong:
- directors, chief executives and alternate chief executives approved under section 71 of the Banking Ordinance (BO);
- managers notified to the HKMA under section 72B of the BO;
- executive officers approved under section 71C of the BO; and
- responsible officers approved under the Mandatory Provident Fund Schemes Ordinance and the Insurance Ordinance.
Summary of the MRC Scheme
An AI recruiting a job candidate within the scope of the MRC Scheme (Recruiting AI) should first obtain written consent (in the form of the template annexed to the Guidelines) from the job candidate for the employment reference checking. It should then request the former and current employers of the candidate (limited to AIs only) for employment references covering the past seven years. In turn, an AI that receives the employment reference request (Reference Providing AI) should make the required disclosures within one month of receiving the request from the Recruiting AI.
The Recruiting AI can request further information within 15 working days of the receipt of the employment reference, which should be given by the Reference Providing AI within another 15 working days.
A job candidate should generally be given the opportunity to be heard by the Recruiting AI, especially if the employment reference contains negative information. The Recruiting AI should then take into account all information received to make the employment decision.
Employment information to be disclosed in the reference
A Reference Providing AI should provide information on the relevant job candidate’s previous employment records over the past seven years, including:
- the candidate’s full name and date of birth;
- whether the candidate’s employment had been or would have been terminated due to a misconduct matter (ie. a breach of legal or regulatory requirements, an incident which cast serious doubts on the candidate’s honesty and integrity, a misconduct report filed with the HKMA, or internal or external disciplinary actions arising from conduct matters);
- whether the candidate is the subject of an ongoing internal investigation in relation to a misconduct matter (subject to considerations such as secrecy, privilege, commercial impact, etc.)1; and
- other information, including any other misconduct matters or ongoing investigations which are deemed serious or material in nature but did not result in (or would not have resulted in) the termination of the candidate’s employment (also subject to similar considerations above).
The information provided by the Reference Providing AI should be true, fair, complete and capable of substantiation (although the supporting documents are not required to be provided to the Recruiting AI), and should follow the form of the MRC Information Template annexed to the Guidelines.
Where are difficulties likely to arise for AIs?
For Recruiting AIs, there are likely to be two key challenges:
- firstly, deciding whether to onboard a candidate pending (and conditional upon) the results of the employment reference, or to hold off on onboarding until the results are received. If the candidate is onboarded and the employment reference is not satisfactory, the Recruiting AI may then need to terminate his/her employment. However, if the onboarding is delayed until a satisfactory employment reference is received, that could mean a delay of one to two months in onboarding, and potentially the loss of the candidate to another role in the meantime; and
- secondly, how to assess any unsatisfactory information in the employment reference. The Guidelines make clear that this is a matter of discretion for the Recruiting AI. However, if the Recruiting AI decides to proceed with the employment and the candidate engages in further misconduct, the decision to employ the candidate may be considered by a regulator in assessing the Recruiting AI’s approach to recruitment. As explained in the Guidelines, Recruiting AIs should document the reasons for hiring a candidate about whom negative or inconclusive information is received.
For Reference Providing AIs, several challenges will also arise:
- the Guidelines have left room for interpretation on the level of detail that should be disclosed in the employment reference and the degree of reasonable assessment that should be made by Reference Providing AIs. The Reference Providing AI will need to determine how much information to provide, knowing that any negative information could lead to the candidate not being able to take up new employment; and
- bearing in mind that the reference period is seven years, Reference Providing AIs will need to think about whether they have sufficient information to respond to requests that go back several years, and in particular in circumstances where an employee may have left employment as part of a mutually agreed separation or by resignation to avoid being terminated. This is an important consideration because Question 8 of the MRC Information Template requires the Reference Providing AI to confirm whether the candidate’s employment would likely have been terminated if they had not resigned or left employment before termination was possible.
While most AIs will already have in place internal controls and procedures on employment references, internal investigation, document retention and data protection and confidentiality, AIs should gain a thorough understanding of the Guidelines, with a view to identifying any gaps within their existing systems and making any changes needed to implement Phase 1 in May 2023, in line with the requirements of the Guidelines. In particular, AIs will need to ensure that they have appropriate systems in place for responding to reference requests that they receive.
Phase 1 will be reviewed after two years (i.e. in around mid-2025), and the approach and arrangements for Phase 2 of the MRC Scheme – which has a much broader coverage than Phase 1 – may be refined before its launch.
For further information, please contact:
Ben Harris, Herbert Smith Freehills
1. If the Reference Providing AI opts not to disclose any ongoing internal investigation in the employment reference, it will be under an obligation to provide an update to the Requesting AI (provided that the candidate remains employed by the Requesting AI at the time) if:
- the investigation completes within 12 months from the request for the employment reference; and
- the investigation concludes that the candidate’s employment with the Reference Providing AI would have been terminated.
If the Reference Providing AI discloses any ongoing internal investigation in the employment, the Requesting AI may request for an update on a quarterly basis for up to 12 months following the employment reference request.