SMCR: regulatory references good practice guide published

Regulatory references is a term used to describe the framework of information sharing provided for under the SMCR to help firms avoid recruiting people with a history of poor conduct into senior roles and other positions where they have the potential to do significant harm to the firm or its customers.

Firms subject to the SMCR must ensure people performing senior management functions, certification functions or notified non-executive director (NED) functions in their organisation are 'fit and proper' persons.

To underpin this requirement, the SMCR obliges firms to seek regulatory references when recruiting new people to perform such roles. It also requires firms to provide regulatory references when they are requested, and in certain cases to also update the references they provide if they become aware of fresh information that would affect a firm's assessment of whether that person is fit and proper.

The Banking Standards Board (BSB) has now issued new good practice guidance on regulatory references in an effort to help firms in the banking sector meet their obligations and set an example for other regulated firms to follow.

Ben Brown of Pinsent Masons, the law firm behind Out-Law, said the guidance would be of wider benefit to other financial services firms.

"Although the BSB’s guidance is aimed at certification functions within the banking sector, it provides helpful direction to all firms who will need to deal with the regulatory reference regime," Brown said.

"The guidance is underpinned by three core principles: fairness, proportionality and consistency. These principles are consistent with existing legal requirements which oblige employers to ensure that any reference is fair, accurate and capable of substantiation. In circumstances where an applicant is rejected for a certified role as a consequence of a negative regulatory reference it will be important for the firm providing the reference to be able to explain and justify the contents of the reference. Further, the guidance warns against firms relying on references exclusively and emphasises the importance of a balanced decision-making process when determining fitness and propriety," he said.

"It will be important for all regulated firms to review this guidance and consider any necessary changes to their processes and practices, for example how disciplinary records are collated and retained for the purposes of consideration when providing future references. From both a regulatory and legal perspective, having the correct checks and balances in place to avoid defective or potentially negligent regulatory references is very important. We are very likely to see disputes arising in cases where a financial services professional is effectively barred from carrying out a regulated role because of a negative reference," Brown said.

The Financial Conduct Authority (FCA) recently released its findings from a short review it carried out into the impact of the SMCR rules on the UK's banking sector. According to those findings, every firm the FCA interviewed was "positive" about the concept of regulatory references, but the majority of respondents felt that the quality and timeliness of references had to be improved. A lack of consistency in how firms record breaches of the conduct rules also created issues for firms, the review found.

From 9 December, the SMCR will apply to all solo-regulated authorised firms. This includes investment advisers, investment managers, private equity firms and consumer credit firms. The BSB said that its new guidance may be of help to those businesses, and that it would further allow banks and other financial services firms "to reference their own policies and procedures against a statement of what ‘good’ looks like".