“Fit & Proper”?
Pre-employment screening is not only a necessity in today’s world but it is also a regulatory requirement for all financial institutions. To prevent fraudsters, terrorists and money launderers from entering the system as legitimate employees, the FSA has provided guidance on what they consider to be adequate levels of vetting for approved persons and by extension all others entering the industry in a permanent, temporary or contracting capacity. The FSA recently issued a report which stated, that there is evidence to suggest that organised crime groups deliberately target firms to place staff to commit financial crime, particularly identity theft.
A recent survey of 1500 UK employers found that 71% had encountered lies on CVs and 49% said it was a serious problem when recruiting staff’ The Guardian
Similar research conducted by Powerchex this month, found that in financial services, the percentage of employees lying on their CV is substantially lower, but still significant at 25%. Clearly, the industry’s pre-employment screening requirement has resulted in a lower incidence of discrepancies and fraudulent background information.
Employment screening practices
Employees need to be screened to meet companies’ standards of internal control and to meet the requirements of the FSA. Failure to have regard to the requirements of the Financial Services and Markets Act 2000 (FSMA) can lead the authorised firm to be in breach of its own obligations to the FSA, and also exposes the firm to risk of employing individuals which can pose severe risk to the organisation.
The obligations of the regulated employer begin at the time of recruitment. To employ an individual who will be performing a controlled function or who will be occupying a position of significant influence, approved person status must be obtained from the FSA. The individual cannot carry out a controlled function until they have been deemed “fit and proper” for the role.
The concept of “fitness and propriety” can be further broken down into the following strands:
The employer will need to submit Form A to the FSA regarding any individual who will be carrying on an approved person’s role, and will need to be confident that the individual put forth for the role fulfils all the requirements of “fitness and propriety” as outlined above. Form A requires a considerable amount of information and any reckless submission of inaccurate or misleading information is a criminal offence.
Completion of the Form A puts an employer in the unenviable spot of having to ensure to the best of their abilities that the 26 issues raised in section 5 of Form A are addressed and then verified. Extensive pre-employment references should be sought prior to confirming an offer and written consent should be obtained from the employee to undertake various credit checks and criminal checks.
It is obviously of paramount importance that the future employer is confident that the employee will be judged “fit and proper” by the FSA prior to confirming an offer. Should any adverse information come to light, then the employee may be unable to perform the role they were recruited for and the offer can be withdrawn prior to the start date of employment.
Most pre-employment checks are fast, unproblematic and relatively inexpensive. Such checks would include: credit and criminal record checks, directorship reports, academic and professional checks and money laundering /ID verifications.
There are however significant problems concerning pre-employment referencing. References should be sought from previous employers and many financial institutions have developed a standard form of questionnaire that follows closely the questions on the FSA’s form A.
Under the Financial Services and Market Act 2000 (FSMA), if a regulated employer is asked for a reference for a former employee and is notified that the prospective employer wishes to appoint the individual as an approved person, the former employer must provide all relevant information of which it is aware, as soon as practically possible.
SUP 10.13.12 of the FSA’s Supervision Manual (SUP) , which deals with approved persons states that if firm X is considering appointing an individual to perform an approved function, and requests a reference from firm B indicating to firm B the purpose of the request, then B must as soon as practically possible give X all relevant information of which it is aware. Under SUP 10.13.12, relevant information is considered to be:
Ø Any outstanding liabilities from commission payments.
Ø Any relevant outstanding or upheld complaints
Ø Section 5 of Form A in SUP Annex 4D; and
Ø Fit 2
Terry Saunders, manager of Small Firms Department at the FSA and previously responsible for handling the response to CP05/10 on approved persons; commented on the spirit of the regulation: ‘SUP 10.13.12R exists to reinforce good practice – providing full and frank references in respect of advisers and other customer function. FSA can and will raise the matter with individual firms where it appears that they are not fulfilling their obligations under this rule. However, it would be more satisfactory for firms to agree a common standard amongst themselves – via trade associations, discussion group’s etc- to ensure that the spirit, as well as the letter of the rule, is complied with’.
This is all well and good, when firms cooperate by sending each other regulated references in reasonable timeframes. The reality however is that few firms respond adequately. The majority tend to bounce the reference between HR the compliance department taking a very long time in producing a response (six weeks is not uncommon). Many firms will just provide a regular HR reference indicating only dates of employment, title and reason for leaving. The reason for this reluctance stems from employers’ fear of breaching data protection legislation and the risk of future employee litigation.
However, references given by one employer to a future employer may not be made the grounds for a liable action by the employee, even if the information proves to be inaccurate, provided that the employer believes the information to be correct and gives it without malice.
The Court of Appeal held that discharge of the duty of care to provide an accurate and fair reference will usually involve making reasonable inquiry in to the factual basis of the statements in the reference, and confirming unfavourable statements about the employee to those matters into which they had made reasonable investigation and had reasonable grounds for believing to be true.
The Court of Appeal held that although, to discharge the duty of care, an employer is not obliged to continue with an inquiry into an employee’s conduct after the employee has resigned, if an investigation is discontinued, unfavourable comments should be confirmed to matters that were investigated.
Although employers now often insert a disclaimer in references to declare to exclude liability for any loss or damage resulting from reliance on the reference, under the Unfair Contract Terms Act 1977, such a disclaimer will only be effective in so far as it ‘satisfies the requirements of reasonableness’. However, the conventional disclaimer is unlikely to be effective regarding those parts of the reference governed by the FSA handbook. Even so, it is perhaps worth including a disclaimer because it may take effect in relation to those parts of the reference that are not governed by the FSA handbook.
References provided under SUP 10.13.12 cannot be obtained from the referee by serving a subject access request under the Data Protection Act since confidential references are exempt from disclosure under schedule 7 of the DP Act. However, the employee may obtain a copy by serving a subject access request on the prospective employer.
Given the reluctance of organisations to provide full and frank references within a reasonable timeframe, the regulated employer is faced with the dilemma of having to either let the new employee start (but not be able to perform and authorised role) or risk losing the candidate to a competitor by taking too long to confirm the appointment.
A way around this dilemma would involve combining two kinds of references to achieve the regulatory requirement. Firstly an HR reference verifying dates of employment, title and reason for leaving and secondly a well placed phone call to a line manager or divisional director probing all the issues of fitness, propriety, integrity and competence.
Our experience at Powerchex is that most line managers are happy to discuss the performance, training record, fitness and integrity of a former employee once provided with a signed consent form from the candidate and the assurance that their reference will remain confidential.
The combination of the two references is enough for the employer to put forth the approved person for a controlled function.
Pre-employment screening is not as straight forward it first appears, as there are many issues that need to be addressed and considered especially when handling references.
An employer needs to be aware that an employee who makes a mistake does not necessarily breach the concept of ‘fitness and propriety’ unless there is reason to believe that one or more of the three components of the concept have been broken . These are:
· Honesty, integrity and reputation
· Competence and capability
· Financial soundness
The offer of employment should state that any inaccurate or misleading statements made to the FSA at the time of application by the employee is grounds for instant dismissal.
The offer made to the candidate should be conditional upon approved person status being achieved.
In most cases, the candidate’s previous line manager is able to provide the required assurance which will allow the recruiting organisation to put the applicant forth for a regulated role.
Employers should not hesitate in requesting verbal references from previous line managers since “a well placed phone call can be more useful than any written reference”.