Proposed Regulatory Referencing Rules Would Take A Bite Out Of The ‘Rolling Bad Apple’

New regulatory rules relating to the references shared between insurance and reinsurance firms when senior insurance executives move roles are expected to be finalised and published shortly.

They are part of the wider changes being introduced by the PRA and the FCA in the shape of the Senior Insurance Managers Regime (SIMR) coming in in March 2016, which will strengthen the accountability of senior individuals at insurance and reinsurance firms. An equivalent regime is also being brought in for the banking sector, in the form of the Senior Managers Regime (SMR), at the same time.

The aim of the new rules on references is to put an end to what has been termed ‘the rolling bad apple’. That is, the employee who moves between firms to avoid having a poor conduct record, as their new employer is not aware of their history.

Under the proposals, affected firms will have to request regulatory references going back six years from former employers of candidates applying for senior insurance management functions. This may also apply to internal moves, such as where an employee is promoted to one of these types of role for the first time.

The reference given must contain certain mandatory information: details of regulated functions held by the candidate, what the roles involved, and the individual’s responsibilities.

More pertinently, the reference must include details if the firm has concluded that the employee breached the regulator’s conduct rules or that they are not fit and proper to perform a function. In addition, it would need to cover a description of the basis for, and outcome of, any internal disciplinary processes taken as a result of the firm having reached one, or both, of those conclusions, and the disciplinary sanctions applied.

On the positive side, the new rules will help to drive up standards of conduct, in keeping with the regulators’ objectives of preventing future scandals and bad behaviour of the sort that were the catalyst for the introduction of the SIMR and the SMR. However, an alternative view is that the catalysing events occurred outside the insurance industry and the cure is being applied too liberally.

Clearly, it is entirely right and proper that an executive who has, in fact, committed a breach of conduct rules, or who is not fit and proper, is subject to regulatory scrutiny, and the new referencing rules should achieve this.

However, in our experience of acting for senior executives in banking and insurance, it is sometimes the case that investigations and disciplinary procedures are brought where there is another agenda against that person. In circumstances where the employee may have no choice but to resign to avoid a disciplinary sanction, or is sanctioned but later vindicated, there is scope for the regulatory referencing process, which depends on a subjective view of the executive held by the former employer, to have an unfairly prejudicial effect on that persons’ career. This is particularly the case where the executive may well be unable to obtain sight of what was said by their former employer on the referencing form and to challenge it.

However, executives can take some comfort from the fact that that the firm giving the reference has a duty to exercise due skill and care in preparing it, and to ensure that the reference is true, accurate, and fair. Whilst it is not a perfect answer, if an executive discovers an inaccurate reference has been given, they would have a potential action in negligence against the firm that gave it.

Additionally, it is proposed that the firm giving the reference will have a duty to update it. So, if the firm becomes aware of new information about the individual, presumably whether good or bad, which would have meant it giving a different reference at the time if it had known it, the firm has to update the reference and provide it to any firm that has asked for a regulatory reference for that person in the last six years.

As with all good rules, the devil is in the detail, and this will not be long in coming. The regulators’ consultation on the proposed rules concluded in December and the final new rules are expected to be published before the SIMR comes in in March.

Nick Wilcox is a solicitor at leading senior executive employment law firm BDBF.