Fit and Proper: It Can Be Hard to Know
Posted: Tuesday, February 06, 2007
by Alexandra Kelly
Powerchex Limited
Pre-employment screening is not only merely strongly advised in today’s world, it is also a regulatory requirement for all financial institutions. In order to preserve and bolster the integrity of the financial services industry, the FSA has provided guidance on what it considers adequate levels of vetting for approved persons and by extension all others entering the industry in a permanent, temporary or contracting capacity. The need for vigilance is supported by evidence, the FSA says, to suggest that organised crime groups deliberately target firms, placing associates to commit frauds and especially identity theft. Alexandra Kelly of Powerchex examines firm’s obligations when recruiting staff and the thorny question of references.
Employment screening practices
Employees need to be screened both to meet companies’ standards of internal control and to comply with FSA requirements. The regulated employer’s obligations begin at the time of recruitment. In order to employ an individual who will perform a controlled function or occupy 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:
· honesty
· integrity and reputation
· competence and capability
· financial soundness
The employer will need to submit ‘Form A’ to the FSA for any individual who is to carry on an approved person’s role, and must be confident that the individual fulfils all the requirements of “fitness and propriety" outlined above. Form A requires a considerable amount of information and any reckless submission of inaccurate or misleading information is a criminal offence.
In completing Form A an employer is placed in the unenviable position of having to ensure to the best of their abilities that the 26 issues exploring credit, criminal, civil and other fitness and propriety issues, which are raised in section 5 of the form, 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 prospective employee to undertake various background checks.
The employer must be confident that the candidate will be judged “fit and proper" by the FSA prior to confirming an offer; they should always specify in their employment contracts that the applicant will be dismissed if they are not able to pass authorisation.
Issues
Most pre-employment checks are fast, unproblematic and relatively inexpensive. They include: credit and criminal record checks, directorship reports, which will highlight any disqualifications and interests in businesses that might compete with or have other reputational impact on the new employer; academic and professional qualification checks; and ID verification.
There are however significant problems around 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.
SUP 10.13.12, 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:
· Any outstanding liabilities from commission payments;
· Any relevant outstanding or upheld complaints;
· Section 5 of Form A in SUP Annex 4D which includes 26 questions about fitness and propriety – whether the individual has any court judgements against them, if they are the subject of an individual voluntary arrangement (IVA), criminal records, disqualifications, civil proceedings, propriety regarding past regulated activities, etc; and
· FIT 2: i n determining a person’s honesty, integrity and reputation, the FSA will have regard to matters including, but not limited to, those set out in FIT 2 which may have arisen either in the United Kingdom or elsewhere and are relevant to the requirements and standards of the regulatory system . For example, under FIT 2.1.3G(1), conviction for a criminal offence will not automatically mean an application will be rejected. The FSA treats each candidate’s application on a case by case basis, taking into account the seriousness of, and circumstances surrounding, the offence, the explanation offered by the convicted person , the relevance of the offence to the proposed role, the passage of time since the offence was committed and evidence of the individual’s rehabilitation. In considering the matters in FIT 2 the FSA will look at whether the person’s reputation might have an adverse impact upon the firm for which the controlled function is or is to be per for med and at the person’s responsibilities.
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 functions. 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 groups, 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 and the compliance department, taking a very long time to produce 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. 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 give rise to liability to 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 in Cox v Sun Alliance (2001) IRLR 448 that the duty on an employer to take reasonable care to ensure that any reference he provides for an employee/ex-employee is accurate and fair will usually involve making reasonable inquiry into the factual basis of the statements in the reference , and confining 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 confined to matters that were investigated.
Although employers now often insert a disclaimer in references to exclude liability for any loss or damage resulting from reliance on the reference, under the Unfair Contract Terms Act 1977 such wording will only be effective in so far as it “satisfies the requirements of reasonableness". The conventional disclaimer is also unlikely to prove effective in respect of those parts of the reference that are governed by the FSA handbook. Even so, it is perhaps worth including it to cover the rest.
References provided under SUP 10.13.12 cannot be obtained from the referee by serving a subject access request under the Data Protection Act 1998 (DPA) since confidential references are exempt from disclosure under Schedule 7 of the DPA. 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 per for m an approved 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 satisfy 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 is that most line managers are happy to discuss the performance, training record, fitness and integrity of a former employee once they have been provided with a signed consent form from the candidate and the assurance that their reference will remain confidential. The combination of the two references should provide the employer with sufficient comfort to put the person forward for FSA approval to undertake a controlled function.
Conclusions
Pre-employment screening is not straightforward, the issue of references can be especially fraught. Employers need to be aware that an employee who makes a mistake does not necessarily breach the concept of ‘fitness and propriety’; their behaviour will need to be assessed against the tests of honesty, integrity and reputation, competence and capability, and financial soundness.
The offer of employment should state that any inaccurate or misleading statements provided to the FSA in the course of the application by the employee are grounds for instant dismissal.
The offer 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 that will allow the recruiting organisation to put the applicant forward for a regulated role.
Employers should not hesitate to request verbal references from previous line managers since “a well-placed phone call can be more useful than any written reference".
Alexandra Kelly may be contacted on tel: +44 (0) 207 709 2056; email akelly@powerchex.co.uk
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