17 July, 2018
On 6 July 2018, the Monetary Authority of Singapore (MAS) issued a Consultation Paper which, among other things, proposes requirements for Financial Institutions (FIs) to conduct and respond to reference checks on representatives (Reference Check Consultation Paper). Submissions on the Reference Check Consultation Paper close on 6 August 2018.
The Reference Check Consultation Paper comes after the release of:
- MAS’ Consultation Paper on its proposed Guidelines on Individual Accountability and Conduct (26 April 2018) (see our article here), which sets out MAS’ expectations for FIs to ensure senior managers’ and employees in material risk functions’ fitness and propriety and focuses on FIs’ on- boarding processes, among other things; and
- the Financial Stability Board’s (FSB) Toolkit for FIs and regulators to use to strengthen governance frameworks to mitigate misconduct risk (20 April 2018) (see our article here), which encourages FIs to introduce a range of measures to reduce the likelihood of hiring a “bad apple”.
1. Purpose of the proposed mandatory reference check requirement
MAS has observed differing standards in FIs’ practices when conducting and responding to reference check requests and is clearly concerned that late, ambiguous, or partial reference check responses are hindering the financial services industry’s collective efforts to ensure that only fit and proper individuals are appointed as representatives. As such, MAS is looking to standardise industry practices by mandating FIs to carry out and respond to reference checks on representatives, as well as setting out the mandatory information that must be provided in the reference.
2. Scope of the proposed mandatory reference check requirement
The proposed reference check requirement would initially apply to prospective representatives of FIs.
However, given that employees who are not representatives may also commit various forms of misconduct, MAS is considering extending the requirement beyond representatives. MAS has said that it will conduct a separate public consultation on this proposal in due course.
The FIs in scope of the proposed mandatory reference check requirement are wide ranging and include capital markets services license holders, licensed financial advisers, registered insurance brokers, exempt FIs (banks, merchant banks, insurance companies and finance companies) conducting regulated activities under MAS-administered legislation.
3. Details of the proposed mandatory reference check requirement
MAS proposes to:
(a) make it mandatory for recruiting FIs to conduct reference checks on their prospective representatives. The reference checks are to be conducted with all previous employers (both MAS regulated FIs and non-regulated companies) of the representative (principal companies) on a best efforts basis. Reference checks may be conducted after the prospective representative’s employment/appointment has ceased with his/her previous principal company and they should cover the prospective representative’s employment history of at least the past 10 years; and
(b) require FIs to provide certain mandatory information on their representatives in response to reference check requests from the representatives’ prospective principal companies which are FIs regulated by MAS.
MAS further proposes to require FIs to provide certain mandatory information in response to reference check requests. The mandatory information is extensive and comprehensive (see below). However, such information would enable recruiting FIs to make a more informed decision on whether or not to hire a prospective representative. The proposed mandatory requirement by MAS that FIs provide the mandatory information no later than 14 days from the date of receipt of a reference check request would also ensure that the decision by recruiting FIs on whether to hire prospective representatives would not be unduly delayed and that decisions could be made expeditiously.
The mandatory information required is as follows:
(a) appointment history: information pertaining to the individual’s appointment history with the FI, the duration of appointment, the roles and job functions of the individual (including last position held), and the reason for the cessation of the appointment (such as resignation, termination, or cessation of contractual tenure);
(b) fitness and propriety records: compliance records on the individual’s fitness and propriety, including but not limited to the following:
- past or ongoing internal or external investigations that the individual is or has been subjected to, and the outcome of the investigations;
- incidents which relate to the individual’s honesty or integrity, and the extent of consumer detriment;
- incidents where the individual had been found to be in breach of legal or regulatory requirements, and the extent of consumer detriment;
- whether misconduct reports were filed with MAS against the individual and, if so, details on the nature of the offences committed and the extent of consumer detriment; and
- disciplinary actions taken against the individual;
(c) scorecard grades: last four balanced scorecard grades assigned to the individual within the past 10 years; and
(d) persistency: persistency of insurance policies sold by the individual and the methodology used in computing the persistency.
While MAS has not said how it intends to enact the mandatory reference check requirement, we expect it would be stated either in relevant MAS-administered Acts, applicable subsidiary legislation or Notices/Directives (as opposed to the issuance of guidelines) considering MAS intends for it to be mandatory.
4. Stemming the rolling bad apples phenomenon
While a number of regulators globally have been focused for some time on bank culture and individual responsibility, comparatively less attention has been paid to addressing the issue of “rolling bad apples” until now. With the release of the FSB’s Toolkit (a resource for both regulators and FIs, which, among other things, encourages firms to introduce a range of measures to reduce the likelihood of hiring a “bad apple”), MAS’ proposed Guidelines on Individual Accountability and Conduct (which reinforce MAS’ expectations for FIs to ensure senior managers’ and employees in material risk functions’ fitness and propriety and focuses on FI’s on-boarding processes, among other things) and now the Reference Check Consultation Paper, we consider it likely that other regulators will take notice and eventually follow suit.
In order to ensure that (i) “bad apples” are accountable for their wrongful misconduct by ensuring that they are not easily hired by other FIs, and (ii) misconduct does not perpetuate in the financial industry, the FSB Toolkit encourages FIs to communicate conduct expectations early in recruitment processes, enhance interview techniques to focus on individuals’ behavioural and conduct histories, and leverage public and private sources of information about candidates. The Toolkit also suggests reassessing employee conduct more frequently (as is already required in jurisdictions with ongoing “fit and proper” requirements) and conducting exit reviews of outgoing employees’ conduct.
By making it mandatory for recruiting FIs to conduct reference checks and for requested-FIs to respond by providing certain mandatory information, these requirements are stricter and more stringent than what is proposed by the Toolkit. This does, however, allow for meaningful information sharing between FIs about employees who may have been involved in wrongdoing, which might not otherwise come to light.
One thing to note is that the proposed mandatory reference check requirement would in effect increase the penalty for wrongdoers. This is because currently, a representative could potentially resign from his/her job before being terminated for misconduct and join a recruiting FI without having to disclose the real reason why he/she left his/her previous job or wants to join the recruiting FI. However, with the proposed mandatory reference check requirement, the days would likely be numbered where a wrongdoer’s past misconduct could slip past the detection of a recruiting FI with little impact on the wrongdoer’s career. As a result, the financial industry will be able to weed out the “bad apples”, leaving only fit and proper individuals to be appointed as representatives.
5. FIs must exercise reasonable care
The Reference Check Consultation Paper also highlights that regardless of whether or not a representative is still appointed by an FI, the FI owes the representative a duty of care in preparing and communicating references. In this regard, FIs should exercise reasonable care to ensure that information provided in the reference is accurate, objective, clear, balanced and based on verifiable facts. The Reference Check Consultation Paper goes on to say that by doing so, this will mitigate potential legal risks to FIs providing references.
In this regard, MAS is likely reminding FIs of their continued duty of care in light of the recent case of Ramesh s/o Krishnan v AXA Life Insurance Singapore Pte Ltd [2016] 4 SLR 1124 where the Singapore Court of Appeal (CA) held that, among other things, employers owed a duty of care to their employees, whether former or present, when preparing a performance reference. The CA also held that when writing a reference for its employee, an employer has to exercise reasonable care to ensure that (a) the facts stated in the reference are true and accurate; and (b) any opinions expressed therein are based on, and supported by, facts which are true. Employers also have to exercise reasonable care to ensure that references do not give an unfair or misleading overall impression of an employee because it fails to present the full picture, even if the discrete pieces of information contained in the reference are factually correct.
Accordingly, FIs would need to ensure that they exercise reasonable care when responding to a recruiting FI’s reference checks under the proposed mandatory reference check requirement. The greater the gravity of any adverse suggestion, the more closely the FI’s conduct would need to be scrutinized. As such, we would suggest that before a response to a reference check is sent, a neutral third party from the FI (perhaps an officer from the legal and/or compliance team of the FI) should objectively consider whether the FI has taken reasonable care to ensure that the suggestion or inference in question is (a) based on facts which are true and accurate; and (b) in view of those facts, fair and reasonable.
6. Increasing costs and the role of HR
Both the Reference Check Consultation Paper and MAS’ proposed Guidelines on Individual Accountability and Conduct (where the head of HR is listed as one of the core management functions) highlight how MAS is placing increasing importance on the HR function as the first level gatekeeper of preventing “bad apples” from entering the FI and ensuring that only fit and proper persons are appointed as representatives.
However, along with this increase in importance would likely come an increase in compliance and HR administrative costs given the extent of the mandatory information involved, which would need to be carefully reviewed by both those FIs providing it and receiving it.
7. Assistance
We have been speaking to regulators, including MAS, about senior manager accountability and the “rolling bad apples” phenomenon during the course of the last two years and William Hallatt, head of our Asia financial services regulatory practice, attended a soft consultation on the FSB Toolkit in September 2017 with 32 senior members of the G20 regulators, 23 senior industry representatives and 4 external counsel from North America.
In Hong Kong and Singapore we have gained many insights from assisting the Asia Securities Industry and Financial Markets Association (ASIFMA) to respond on behalf of its members to the Hong Kong Securities and Futures Commission’s soft consultation on the MIC Regime and MAS’ consultation on its proposed Guidelines on Individual Accountability and Conduct. We have also advised a number of global banks and financial institutions on the implementation of the various senior manager accountability regimes.
For further information, please contact:
Natalie Curtis Of Counsel
Head of Financial Services Regulatory, Singapore
natalie.curtis@hsf.com
