References were introduced in the context of the senior managers and certification regime (SMCR) to help prevent the recycling of individuals with poor conduct records between financial institutions (see Briefing “Senior managers and certification regime: food for thought for in-house lawyers”). The FCA acknowledged this concern and the difficulties that firms may have when assessing prospective employees’ suitability without adequate regulatory intelligence, and so designed its rules to plug this information gap.

Going forwards, firms providing references will be required to include information regarding matters that happened or existed:

From March 2017, firms will be required to keep adequate records to produce references for at least six years. If firms do not have six years’ worth of records as of March 2017, they must include a disclaimer to this effect in any reference provided.

The six-year time limit does not apply to serious matters or serious misconduct. The key to determining what is a serious matter or serious misconduct will be to assess how important the information still is for the firm requesting the reference to assess the fitness and propriety of a prospective employee. The FCA has given some guidance in the new rules on this point, but it is far from black and white. For example, the FCA notes that dishonesty is an important factor when determining whether an employee has engaged in serious misconduct but that it might not be automatically decisive in every case.

Firms may find it challenging to prescribe for every eventuality on this front in their policies and procedures. As a result, if an employee has a potentially serious issue that took place more than six years ago, firms may need to consider on a case-by-case basis whether it needs to be disclosed in a reference. Firms must also ensure that they put in place appropriate governance around this process to ensure that any competing regulatory and employment issues are considered (see “Employment litigation risk” below).

If a firm subsequently identifies information that would have changed the information which they included in a reference, the firm will be required to update its reference. For example, if an investigation conducted after an employee left a firm gives rise to concerns about his conduct, the firm may need to consider updating the reference that was originally provided.

Firms will have to make reasonable inquiries as to the identity of a former employee’s current employer. No guidance is given as to what constitutes “reasonable” in this context. It may prove challenging for firms to discover where a former employee works, as he may have moved on again. Firms will likely find themselves resorting to checking sources such as LinkedIn.

References, including updated references, need to be fair to the employee, which will normally require that the employee is given an opportunity to comment on the information included in a reference.

This is relatively straightforward when dealing with current employees but is more challenging when dealing with former employees; for example, where a regulatory investigation uncovers previously unknown misconduct or where an employee resigns on learning about serious misconduct charges.

Firms are likely to amend their policies to include some form of conduct assessment with a right of reply in respect of former employees. This would be akin to a quasi-disciplinary process, so that if a firm identifies potentially troubling information, it would contact the former employee, who would be provided with an opportunity to make representations before the firm investigates the matter and concludes what information, if any, needs to be added to the reference. Difficult decisions, such as what information should be shared with a former employee, will need to be made.

Dismissed employees are less likely to raise a claim (for example for unfair dismissal, discrimination or victimisation) if they have another job, as they would have difficulty in establishing loss and probably less inclination to spend the time it takes to pursue an action. The chance of a former employee bringing a claim therefore increases if he finds it difficult to find alternative employment. This is a particular issue in the financial services sector where a qualified reference, for example setting out serious misconduct, makes it very difficult for an individual to work in that sector again because firms will normally require a clean reference. This has been seen with the number of employment tribunal decisions that followed the FCA’s foreign exchange and London Interbank Offered Rate investigations; put simply, these claimants had less to lose in light of the findings that the firms made against them and the effects that these findings had on their careers.

From March 2017, firms will also have to consider the employment litigation risk posed by former employees. Given the effect that a changed reference will have for a former employee, he is likely to strongly resist any investigation and any subsequent change to the reference.

Every case will be different but there are some clear difficulties ahead for firms; for example, a former employee who raised numerous grievances and left under a confidential settlement agreement will likely argue that the new investigation, and any change in reference, amounts to post-employment victimisation. Firms will need to think carefully how, and when, they deal with former employees given the legal risks.

Firms will need to implement adequate systems and controls to allow them to comply with the new rules. The regulators have not been granular when it comes to their requirements in this area. The FCA requires firms to establish, implement and maintain policies and procedures that are adequate for the purpose of complying with the obligations relating to references. The PRA’s requirements are similarly high-level.

Firms will need to produce policies setting out their general approach to requesting and receiving references, and consider drawing up detailed processes that set out how information will be gathered, stored, collated and presented.

The existing prescribed responsibilities for senior managers in UK firms and non-EEA branches concerning compliance with the SMCR have been amended to include responsibility for overseeing compliance with the new rules. As a result, the relevant senior managers will need to be involved in and briefed about the approaches being adopted by their firms.

Some firms may decide to request and provide the information required by the new rules in advance of March 2017. As a result, whether or not firms are subject to the new rules, they should have plans in place to handle requests for more detailed references before March 2017 (see also box “Other developments”).