Banks in London Facing New Regulations on Misconduct Reporting
Banks in London may not be the raucous places they once were, but not are they completely devoid of poor behaviour. When poor behaviour occurs and is reported, it’s standard practice for an HR department to embark upon an investigation. It’s then common for the offender to immediately resign and seek work elsewhere before their bad behaviour is investigated and documented.
This is no longer possible.
As of this month, banks in London are obliged to include suspected misconduct on regulatory references, even where investigations into the misconduct have not been finalised.
The new requirements are part of updated guidelines from the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). These guidelines specify that if a firm has good grounds to consider that the suspected misconduct would be relevant to the new employer’s assessment of an employee’s fitness and probity, the misconduct should be disclosed in the reference.
Bad behaviour should also be disclosed if it would be ‘material if true,’ and if the firm has “reasonable grounds” for assuming the misconduct took place. It doesn’t have to be disclosed in a reference if there are only “unproven allegations or mere suspicions,” though.
Implications for Banks and Individuals
Lawyers say the changes have implications for banks as well as individuals. “This is an area where regulatory law and employment law meet directly,” says Sebastian Sayer, a partner at Fox Williams. “Firms will need careful processes. They should avoid both suppressing relevant information because an investigation was unfinished, and over-disclosing allegations that have not been tested. The safest position is to ensure the reference is accurate, fair, evidenced, proportionate and clearly framed.”
Lorraine Johnston, a partner at Ashurst, said the new requirement that even suspected misconduct will be included in references places a lot of responsibility on banks. It “imposes a subjective judgment on materiality, evidential basis, fairness and employment law,” says Johnston.
Changes in Reference Processes
Adding suspected misconduct to references is being accompanied by an expectation that banks provide these references in four weeks instead of six. In combination, Jonathan Herbst, global head of financial services at Norton Rose, says the two changes mean banks will need “faster, better-documented investigation and reference processes, because poor records will create both regulatory and employment-law risk.”
The new approach should prevent “rolling bad apples” moving from one firm to another simply by resigning at the whiff of an investigation. Given that bad behaviour still often involves male bankers and female intern and that intern season is upon us, bad actors may want to take note.
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