Hong Kong – One Bad Apple Can Spoil The Whole Bunch.

Phase 1 of the Mandatory Reference Checking Scheme (“MRC Scheme”) launched at the beginning of the month to stop “rolling bad apples”. 

Background

On 5 May 2022, the Hong Kong Monetary Authority (“HKMA”), announced its endorsement of the Guidelines of the MRC Scheme issued by the Hong Kong Association of Banks and the DTC Association. 

The intention of the MRC Scheme is to address the “rolling bad apples” phenomenon within the banking sector, where individuals with misconduct records are free to move between firms without the need to disclose their misconduct to the new employer.  

The MRC Scheme is applicable to all Authorised Institutions (“AIs”) and provides a framework to facilitate cooperation amongst employers to make informed employment decisions, and in turn protects the integrity of the Hong Kong banking sector. 

MRC Scheme

The MRC Scheme aims to facilitate the background check process within the banking industry by regulating the disclosure requirements of prospective employees taking up roles within HKMA regulated AIs. The MRC Scheme applies solely to AIs and not to the broader financial sector outside of the banking industry. 

The MRC Scheme will prevent employees with a record of misconduct during their employment in one institution from obtaining subsequent employment in another institution without disclosing said misconduct to their new employer. This will increase the credibility and the public confidence in the banking sector.    

The MRC Scheme will be implemented in two phases. Phase 1 launched earlier this week on 2 May 2023, and applies to those in senior management positions such as directors, chief executives, alternate chief executives and managers (as defined under the Banking Ordinance (Cap. 155)), executive officers and responsible officers for securities, insurance, and Mandatory Provident Fund regulated activities. The MRC Scheme will be reviewed in mid-2025, when it is expected that Phase 2 will be launched and expanded to cover individuals licensed or registered to carry out regulated activities. 

Under the MRC Scheme, AIs recruiting prospective employees (“Recruiting AI”)are required to approach the former and current AI employer(s) for the relevant conduct-related information covering the last seven-year period (“Reference Providing AIs”). Reference Providing AIs should provide the relevant information within one month of the request using the standard form template being developed by the Industry Working Group (“IWG”). 

Reference Providing AIs have a duty to provide references containing information that is material or serious in nature including incidents of misconduct as follows:

1. Breach of legal or regulatory requirements relating to the Banking Ordinance (Cap. 155), Insurance Ordinance (Cap.41), Mandatory Provident Fund Scheme Ordinance (Cap.485) and Securities and Futures Ordinance (Cap.571);
2. Incidents which cast doubt on an individual’s honesty and integrity. This may include offer / acceptance of advantages from third parties, conflict of interest, corruption among others;
3. Misconduct reports filed with the HKMA.; 
4. Ongoing internal investigations – the IWGwill provide further guidance on the types of ongoing investigations to be included and the types of exemptions that should apply. But generally speaking, ongoing investigations with allegations that are of serious nature as well as those which are about to conclude with disciplinary actions should be disclosed. Such investigations can include employee fraud, harassment, market misconduct, conflicts of interest among others.  

If in the exercise of the Recruiting AI’s discretion, the Recruiting AI proceeds to employ an individual notwithstanding negative or inconclusive information, they should document the reasons and rationale for employing an individual with negative or inconclusive information received. Recruiting AIs and Reference Providing AIs should continue to monitor any publications by the IWG. 

Takeaways for Previous Employers (Reference Providing AIs)

Referencing Providing AIs should review and revise their internal policies and guidelines to ensure compliance with the MRC Scheme.  

In preparation for receiving MRC Scheme requests, some recommendations for Reference Providing AIs include:

1. Retaining a record of employees that fall within the specified positions of the MRC Scheme for a period of 7 years; 
2. Setting up a HR template response to the request by the Recruiting AI; 
3. mplementing internal guidelines to specify the employment information to be disclosed in the reference, which can be amended on a case-by-case basis; and
4. Publishing on their website contact details in respect of the MRC Scheme for other AIs to make MRC requests.  

Upon receiving an MRC Scheme request from a Recruiting AI, Reference Providing AIs should:

5. Comply with the Recruiting AIs’ request within 1 month;
6. Review whether the employee’s employment records are subject to any secrecy, legal privilege and confidentiality obligations;
7. Review and revise any non-disclosure agreements to ensure the AIs’ obligations are complied with;
8. Assess the level of detail that should be disclosed in the employment reference;
9. Assess whether there is sufficient information to respond to circumstances where an employee may have left employment by way of a mutually agreed separation or by resignation to avoid being terminated;
10. Review and ensure that consent has been provided by the previous employee of the Reference Providing AI;
11. Comply with any follow-up actions with HKMA if initiated; and
12. Update the Recruiting AI upon conclusion of investigation cases where the individual is found to have committed serious misconduct within one month after the cases are concluded.

Takeaways for New Employers (Recruiting AIs)

Recruiting AIs will have to consider whether to onboard a candidate pending the results of the employment reference or hold off onboarding until the results are satisfied. When carrying out such assessment, special attention should be given to:

1. The assessment of negative or inconclusive information in the background checks received;
2. The possibility that the Recruitment AI may be subject to regulatory assessment concerning their recruitment strategy;
3. Ensuring that they have sought consent from the prospective employee to carry out a background check;
4. Exercising flexibility by making a conditional offer or requiring the prospective employee to provide a self-declaration that he / she has not been involved in any misconduct incidents or subject to any material disciplinary actions, pending the completion of the MRC Scheme; and
5. Retaining the prospective employees’ records in the event of HKMA inquiries and implementing a data retention policy for MRC data. The proposal is for the Recruiting AI not to retain any data for a period of longer than 2 years from the date of rejection unless there is a subsisting reason that obliges the Recruiting AI to retain data.
6. Implementing policies and procedures to safeguard the integrity and confidentiality of information obtained and processed during the MRC process. Adequate security measures should be in place to prevent unauthorised access to MRC data.  

Takeaways for Employees

Prospective employees should be provided with the opportunity to be heard by the Recruiting AIs in circumstances where there is any negative or inconclusive information from the Reference Providing AIs, including but not limited to cases where the misconduct incident has been substantiated, or where external or internal disciplinary actions have been taken against the individual. However, this is subject to any legal or regulatory prohibition, such as a confidential investigation, secrecy, potential tipping off etc. 

As Recruiting AIs will request for references from the current employers, one concern for prospective employees is the timing of sending out such requests as this may expose the prospective employee’s intention to change jobs. In turn, if the prospective employee is unable to secure a job offer, this will impact the relationship between the prospective employee and the current employer. The HKMA therefore recommends that:

1. A conditional offer be made to the prospective employee, if applicable, subject to the Recruiting AI receiving satisfactory / complete MRC Scheme check;
2. Obtaining the prospective employee’s consent for the MRC Scheme check;
3. Upon notification of resignation of the prospective employee, an MRC Scheme request can be sent to the Reference Providing AI;
4. Upon receiving the satisfactory / complete MRC information, a final offer can be issued. 

Conclusion

Both Recruiting and Reference Providing AIs should review and revise, if necessary, their internal policies and controls surrounding employment records and document retention to ensure that such policies comply with the Guidelines of the MRC Scheme. 

For further information, please contact:

Felda Yeung, Partner, Gall

feldayeung@gallhk.com