UK: Government to review SMCR rules as part of Edinburgh Reforms

20 December, 2022

Our Financial Services Regulatory team have prepared a series of webcasts examining the sweeping reforms to the UK financial services sector recently announced by the Chancellor of the Exchequer, Jeremy Hunt – known as “the Edinburgh Reforms.”

The webcasts explain:

• what the key proposals are;

• who they might impact;

• next steps and timing;

• and the potential significance and impact.

The reforms include the Government’s plans to review the Senior Managers & Certification Regime (SMCR) in the first quarter of 2023 and partner Clive Cunningham discusses these changes. The Government Call for Evidence will look at the legislative framework of the regime and determine the consensus on the regime’s effectiveness, scope and proportionality.

The Regulators’ review will involve the FCA and PRA review of the regulatory framework taking into account the Government Call for Evidence. This review is potentially significant for all firms and individuals subject to the SMCR. Given the implementation of the SMCR was costly and burdensome for many firms, this is an important development for those in the financial services sector to watch and be aware of.

The webcasts can be viewed here.

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278

Hong Kong: Authorised institutions to implement the new Mandatory Reference Checking Scheme by May 2023

5 December, 2022

On 5 May 2022, the Hong Kong Monetary Authority (HKMA) announced its endorsement of the Guidelines on the Mandatory Reference Checking Scheme (respectively, Guidelines and MRC Scheme) issued by the Hong Kong Association of Banks and the DTC Association – just one year after issuing the Consultation Conclusions Paper (covered in our previous bulletin).

The MRC Scheme has been launched as an effort to curb the “rolling bad apples” phenomenon in the banking sector in Hong Kong, by enhancing the disclosure of the employment history of prospective employees taking up regulated roles among authorised institutions (AIs). The MRC Scheme will be launched in two phases, and AIs are given 12 months (ie. up to 2 May 2023) to put in place the necessary internal controls, policies and procedures, for the implementation of Phase 1 of the MRC Scheme (Phase 1).

Scope of Phase 1

Phase 1 covers the following senior management positions within AIs in Hong Kong:

  • directors, chief executives and alternate chief executives approved under section 71 of the Banking Ordinance (BO);
  • managers notified to the HKMA under section 72B of the BO;
  • executive officers approved under section 71C of the BO; and
  • responsible officers approved under the Mandatory Provident Fund Schemes Ordinance and the Insurance Ordinance.

Summary of the MRC Scheme

An AI recruiting a job candidate within the scope of the MRC Scheme (Recruiting AI) should first obtain written consent (in the form of the template annexed to the Guidelines) from the job candidate for the employment reference checking. It should then request the former and current employers of the candidate (limited to AIs only) for employment references covering the past seven years. In turn, an AI that receives the employment reference request (Reference Providing AI) should make the required disclosures within one month of receiving the request from the Recruiting AI.

The Recruiting AI can request further information within 15 working days of the receipt of the employment reference, which should be given by the Reference Providing AI within another 15 working days.

A job candidate should generally be given the opportunity to be heard by the Recruiting AI, especially if the employment reference contains negative information. The Recruiting AI should then take into account all information received to make the employment decision.

Employment information to be disclosed in the reference

A Reference Providing AI should provide information on the relevant job candidate’s previous employment records over the past seven years, including:

  • the candidate’s full name and date of birth;
  • whether the candidate’s employment had been or would have been terminated due to a misconduct matter (ie. a breach of legal or regulatory requirements, an incident which cast serious doubts on the candidate’s honesty and integrity, a misconduct report filed with the HKMA, or internal or external disciplinary actions arising from conduct matters);
  • whether the candidate is the subject of an ongoing internal investigation in relation to a misconduct matter (subject to considerations such as secrecy, privilege, commercial impact, etc.)1; and
  • other information, including any other misconduct matters or ongoing investigations which are deemed serious or material in nature but did not result in (or would not have resulted in) the termination of the candidate’s employment (also subject to similar considerations above).

The information provided by the Reference Providing AI should be true, fair, complete and capable of substantiation (although the supporting documents are not required to be provided to the Recruiting AI), and should follow the form of the MRC Information Template annexed to the Guidelines.

Where are difficulties likely to arise for AIs?

For Recruiting AIs, there are likely to be two key challenges:

  • firstly, deciding whether to onboard a candidate pending (and conditional upon) the results of the employment reference, or to hold off on onboarding until the results are received. If the candidate is onboarded and the employment reference is not satisfactory, the Recruiting AI may then need to terminate his/her employment. However, if the onboarding is delayed until a satisfactory employment reference is received, that could mean a delay of one to two months in onboarding, and potentially the loss of the candidate to another role in the meantime; and
  • secondly, how to assess any unsatisfactory information in the employment reference. The Guidelines make clear that this is a matter of discretion for the Recruiting AI. However, if the Recruiting AI decides to proceed with the employment and the candidate engages in further misconduct, the decision to employ the candidate may be considered by a regulator in assessing the Recruiting AI’s approach to recruitment. As explained in the Guidelines, Recruiting AIs should document the reasons for hiring a candidate about whom negative or inconclusive information is received.

For Reference Providing AIs, several challenges will also arise:

  • the Guidelines have left room for interpretation on the level of detail that should be disclosed in the employment reference and the degree of reasonable assessment that should be made by Reference Providing AIs. The Reference Providing AI will need to determine how much information to provide, knowing that any negative information could lead to the candidate not being able to take up new employment; and
  • bearing in mind that the reference period is seven years, Reference Providing AIs will need to think about whether they have sufficient information to respond to requests that go back several years, and in particular in circumstances where an employee may have left employment as part of a mutually agreed separation or by resignation to avoid being terminated. This is an important consideration because Question 8 of the MRC Information Template requires the Reference Providing AI to confirm whether the candidate’s employment would likely have been terminated if they had not resigned or left employment before termination was possible.

Next steps

While most AIs will already have in place internal controls and procedures on employment references, internal investigation, document retention and data protection and confidentiality, AIs should gain a thorough understanding of the Guidelines, with a view to identifying any gaps within their existing systems and making any changes needed to implement Phase 1 in May 2023, in line with the requirements of the Guidelines. In particular, AIs will need to ensure that they have appropriate systems in place for responding to reference requests that they receive.

Phase 1 will be reviewed after two years (i.e. in around mid-2025), and the approach and arrangements for Phase 2 of the MRC Scheme – which has a much broader coverage than Phase 1 – may be refined before its launch.

___________

1 If the Reference Providing AI opts not to disclose any ongoing internal investigation in the employment reference, it will be under an obligation to provide an update to the Requesting AI (provided that the candidate remains employed by the Requesting AI at the time) if:

the investigation completes within 12 months from the request for the employment reference; and
the investigation concludes that the candidate’s employment with the Reference Providing AI would have been terminated.
If the Reference Providing AI discloses any ongoing internal investigation in the employment, the Requesting AI may request for an update on a quarterly basis for up to 12 months following the employment reference request.

Ben Harris
Ben Harris
Executive Counsel, Sydney
+61 29322 4929
Ellie Cheung
Ellie Cheung
Associate, Hong Kong
+852 2101 4179

Global Bank Review 2022: Banking on People

20 October, 2022

A sign of the times or just business as usual?

Surveying the current landscape of the financial sector in late 2022, it is hard to avoid the sense of an industry once again facing a severe squeeze. One thing is certain: global finance is currently facing mounting pressure to invest long-term for a low-carbon, high-tech world in the decades to come, while bracing itself for intense economic headwinds and volatility on the immediate horizon.

Those conflicting pressures can be seen in almost all aspects of the industry, but perhaps none more so than in the life blood of finance: its people. Against this backdrop, ‘Banking on People’ delves deeper into the people-centric strategic issues banks are grappling with, including the industry’s ability to attract and retain talent; the risks and reward of AI-assisted banking; the rise of activism; and the increased regulatory scrutiny on culture and conduct, as well as featuring insights from bank GCs on the evolving role of in-house legal teams.

You’ll find all of these challenges and more explored in this edition of the Global Bank Review, our sixth annual review drawing on a wealth of sector experience from across our network. Getting through the squeeze will require insight, judgement, and a keen grip on a changing risk environment. We hope this edition helps you navigate the journey.

Read our report here.

The report covers:

  • All change – The evolving role of banks’ in-house legal teams. Read more.
  • #CustomerIsKing – Banks strive to stay relevant and satisfy regulators in the social media age. Read more.
  • What lies beneath – Cyber threats and manager liability. Read more.
  • Power plays – Have social shifts upended the old-age bargain banks make with staff? Read more.
  • Ghosts in the machine – the rewards and risks of AI-assisted banking. Read more. 
  • Calm under pressure – The chair’s strategic role as activists target AGMs. Read more. 
  • Unchartered territories – A time for brave leadership. Read more. 
  • Non-financial misconduct – Where to draw the blurry line? Read more. 

 

Global Bank Sector Chairs

Hannah Cassidy
Hannah Cassidy
Partner, Hong Kong
+852 2101 4133
Simon Clarke
Simon Clarke
Partner, London
+44 20 7466 2508
Tony Damian
Tony Damian
Partner, Sydney
+61 2 9225 5784

 

AI fairness in UK financial services

23 June, 2022

With the ongoing development and growing application of artificial intelligence, analytics and automation there is increasing public and regulatory interest in ensuring that any potential risks stemming from these technologies are mitigated. A key area of concern is around ‘bias’ and AI fairness. This whitepaper – prepared in collaboration with UK Finance  – explores ideas of AI fairness and what these mean for financial services firms, with a focus on the key overlapping regulatory considerations.

We see today growing scrutiny of the use of artificial intelligence (“AI”) and algorithms, and a greater awareness of the potential for these technologies to exacerbate some consumer risks.

Questions touching on AI ethics and fairness are becoming more mainstream. In recent years we have seen greater public consciousness of what was once a relatively obscure academic issue. This includes the close attention paid to the use of an algorithm to determine 2020 A-levels by the Office of Qualifications and Examinations Regulation (or “Ofqual”).

There is no doubt that law makers and regulators around the world are taking note and working to update their own approaches. In the UK, policy makers at the Office for AI are working on an AI policy whitepaper, while the Department for Digital, Culture, Media and Sport has consulted on changes to data protection law to account for AI challenges. On the regulatory front, the Digital Regulatory Cooperation Forum is considering the approach of UK regulators to algorithm-related issues and the Equality and Human Rights Commission has included AI guidance in its strategic plan for 2022-25. And in financial services specifically, the AI Public Private Forum has produced its long-awaited report, with a discussion document from the Bank of England and FCA signposted as a next step.

This is all taking place within the wider context of a greater public awareness of social justice issues. These can be complex at times, with an interaction between current practices and the legacy of historical injustices, which can still be felt today.

Nonetheless, AI holds the promise to enable a leap forward in the provisions of financial services, not only in efficiency improvements for firms but also in real benefits for customers. The roll out of AI into more financial sector applications has the potential to bring more personalisation of products and services for consumers, to enable greater financial inclusion and to permit more effective protection against fraud and other economic crime.

It is therefore no surprise that questions of AI fairness and bias are front of mind. It will take time for UK Plc to work through all of the complexities so that consumers and society can enjoy the benefits of AI technology, with confidence that it is being used fairly and ethically. We hope that this whitepaper will be a helpful contribution to the debate.

Download your copy here.

You can also access our webinar on this topic here.

Recommended Reading

Key Contacts

If you would like to discuss any of the developments highlighted above may affect your scheme or organisation speak to your usual HSF adviser or contact one of our specialists.

Karen Anderson
Karen Anderson
Partner, London
+44 20 7466 2404

Jon Ford
Jon Ford
Senior Associate, London
+44 20 7466 2539

Miriam Everett
Miriam Everett
Partner, London
+44 20 7466 2378

Sian McKinley
Sian McKinley
Senior Associate (Employed Barrister)
+44 20 7466 2996

UK: FCA publishes final rules on diversity-related disclosures by listed companies

22 April, 2022

The Financial Conduct Authority (FCA) has published a policy statement (PS22/3) setting out rule changes that will require premium and standard listed companies to make disclosures in relation to gender and ethnic diversity at board and executive management level for financial years starting on or after 1 April 2022.

Under the new Listing Rule requirements, premium and standard listed companies will have to include in their annual report a statement confirming whether they have met specified board diversity targets as at a reference date, chosen by the company, in the financial year. The targets are that:

  • the board comprises at least 40% women;
  • at least one of the Chair, CEO, CFO or Senior Independent Director is a woman; and
  • at least one member of the board is from a minority ethnic background (that is one of the ethnic background categories recommended by the UK Office for National Statistics, other than a white ethnic group).

Companies not meeting these targets will be required to explain why they have not done so.

In addition, premium and standard listed companies will be required to include tabulated data in their annual report on the gender identity or sex (at the company’s choice), and the ethnic diversity, of members of their board and executive management. Companies are also required to explain their approach to collecting the data and apply it consistently.  In changes from the FCA’s original proposals:

  • the Listing Rules will allow companies some flexibility in how they collect and report on this data, reflecting potential privacy concerns raised during the consultation process; and
  • there is a specific exemption from reporting where board members or management are situated overseas and local laws in that jurisdiction prevent collection or publication of such data.

The rules note that companies may also choose to include a brief summary of key policies, procedures and processes and any wider context that they consider contribute to improving board or executive management diversity, any mitigating factors, any foreseen risks in relation to meeting the targets and any plans to improve board diversity.

The final rules also expand the disclosures required in the corporate governance statement in relation to a company’s diversity policy under DTR 7.2.8AR (see our corporate update 2016/23). The description should cover any aspects of the policy concerning ethnicity, sexual orientation, disability and socio-economic background (in addition to age, gender and educational and professional background, mentioned previously). Companies will also need to disclose how their diversity policy is applied to their key board committees.

Whilst the new disclosure requirements apply for financial years starting on or after 1 April 2022, the FCA is encouraging companies to include these disclosures in their annual report on a voluntary basis ahead of this date. The FCA is of the view that, since companies can choose their own reference date against which to make these disclosures, companies could put in place the necessary processes to collect and report on this data sooner, for example for financial years starting on or after 1 January 2022.

The rules will be reviewed in three years’ time, at which point the FCA will consider whether to revise the nature or level of the targets and whether to consider targets on other aspects of diversity.

The policy statement also notes that the FCA is currently considering the responses to its discussion paper on ‘Diversity and inclusion in the financial sector’ together with the responses to its recent diversity and inclusion pilot data survey and cost benefit analysis survey. The FCA expect to publish a consultation paper in 2022.

A Spotlight on D&I in the Financial Services Sector

28 March, 2022

In the second of our Diversity and Inclusion Podcast Series, Christine Young, Hywel Jenkins and David Palmer discuss the key points for regulated firms in light of the regulators’ increasing focus on diversity and inclusion.

Key Contacts

If you would like to discuss any of the topics covered in this podcast speak with your usual HSF adviser or contact one of our specialists.

Christine Young
Christine Young
Partner, Employment, London
+44 20 7466 2845
Hywel Jenkins
Hywel Jenkins
Partner, Disputes, London
+44 20 7466 2510
David Palmer
David Palmer
Senior Associate, Employment, London
+44 20 7466 3846

UK: tribunal orders re-engagement overseas of unfairly dismissed trader in light of negative regulatory reference

9 March, 2022

The recent tribunal ruling in Jones v JP Morgan Securities plc illustrates how a financial services employer’s position on providing a regulatory reference could influence the likelihood and nature of a tribunal order to re-engage an employee who has been unfairly dismissed.  It is also flags the possibility of an order being made to procure re-engagement at an associated employer overseas.

The tribunal held that the claimant had been unfairly dismissed for alleged gross misconduct: it found that the employer did not have a genuine belief in misconduct having occurred and that the procedure adopted was also unfair.  This finding did not change the employer’s position that it would provide a regulatory reference stating that it did not consider the claimant to be a fit and proper person.  The claimant sought a reinstatement or re-engagement order (see box below).

Reinstatement was found to be impracticable as the relevant team had reduced in size and there was no longer a role available.  The claimant therefore sought re-engagement in an available comparable role at an associated employer in Hong Kong, arguing that he was unable to get a regulated financial services job elsewhere in the UK because of the employer’s negative regulatory reference.

In deciding whether to make such an order a tribunal must consider the wishes of the claimant, whether it is reasonably practicable for the employer to comply with the order, and whether the claimant contributed to the dismissal. In this case the tribunal rejected the employer’s contention that the claimant did not actually want to be re-engaged and was seeking it only as a tactic to circumvent the compensatory caps.  Its conclusion that the claimant’s request was genuine was supported by findings that his entire career had been structured around working for the employer’s group, that he bore the employer no ill-will, and that his stop-gap work had been chosen to enable him to leave on short notice.  The tribunal found that the employer could easily procure the Hong Kong role in the associated company and had not presented any evidence that certification requirements would be a problem there. It concluded that, if re-engagement was not awarded, the claimant would never work in a regulated role in the financial services sector again and therefore the order sought was the only way that the unfair dismissal could be “made right”.  An order was made requiring re-engagement within 3 months and a day, by 10 March 2022, along with payment of £1.5 million in compensation for lost earnings.

Together with Fotheringhame v Barclays Services Ltd in 2019 covered in our blog post here, this case highlights the risk for financial services employers of claimants obtaining reinstatement or re-engagement orders and/or substantial levels of compensation for unfair dismissal, notwithstanding – or because of – regulatory concerns.  It may be appropriate for an employer to consider carefully whether facts established at a tribunal hearing could and should justify revisiting their assessment of the individual.

The facts also flag the need for an individual to be able to appeal a firm’s determination that the individual lacks fitness and propriety, a mechanism that is not currently available from regulators, given the impact that reference will have on their future career prospects.

Reinstatement / re-engagement orders

Orders for reinstatement or re-engagement after an unfair dismissal finding are very rare, not least as claimants rarely wish to return to their former employer in these circumstances.  Claimants are more likely to seek such an order where they face significant difficulty finding other employment, or where the individual is a high earner whose unfair dismissal compensation would be reduced by the statutory limits – both of which may be more common in the financial services sector.

Where a reinstatement or re-engagement order is made, a tribunal will also require payment of the original remuneration package from dismissal until the date of ordered reinstatement or re-engagement.

An employer cannot be forced to comply with a reinstatement or re-engagement order but, if they refuse, the tribunal will substitute a basic and compensatory award and will also make an additional award of between 26 and 52 weeks’ pay (unless compliance with the order would have been impracticable).  Although these awards will be subject to the statutory caps (on weekly pay and compensatory award), the caps are lifted to the extent necessary to ensure that the amount of the compensatory award plus additional award are at least as much as the lost remuneration that would have been payable had the reinstatement/re-engagement order been complied with. Where there has been a considerable delay between dismissal of a high earner and the tribunal hearing and consequent date reinstatement/re-engagement is ordered, the financial compensation could greatly exceed the usual cap on unfair dismissal compensation.

 

Anna Henderson
Anna Henderson
Professional Support Consultant, London
+44 20 7466 2819
Christine Young
Christine Young
Partner, London
+44 20 7466 2845
Nick Wright
Nick Wright
Senior Associate, London
+44 20 7466 7524

UK: tribunal orders bank to carry out and publish equal pay audit within 6 months, notwithstanding existing equal pay review process

9 March, 2022

The employment tribunal in Macken v BNP Paribas has recently given its remedy judgment in relation to successful claims of sex discrimination and equal pay brought by a female banker, following a two year covid-related delay to the remedy hearing.  A substantial compensation award was made, including aggravated damages in part due to the lack of genuine apology, and the tribunal also ordered an equal pay audit to be carried out (and published).  Notably, this was notwithstanding measures the employer had already taken to review pay as part of a remediation programme established in consultation with the FCA.

Compensation

The award of over £2 million compensation included significant amounts for past and future losses of earnings (on the assumption that M would remain employed and receive PHI payments until age 65), loss of congenial employment, personal injury and injured feelings.  £15,000 was also awarded for aggravated damages, on the basis that some of the managers’ discriminatory conduct was “spiteful and vindictive”, that they had not apologised for their discriminatory behaviour and had not been disciplined in any way.  A 20% uplift of over £300,000 was also applied for failure to deal with grievances in accordance with the Acas Code of Practice on Disciplinary and Grievance Procedures, in the form of a failure to carry out the necessary investigations to establish the facts and to approach the grievance impartially.  However, the tribunal did not accept the claimant’s contention that the employer’s without prejudice offer prior to hearing the appeal against the grievance was also inappropriate.

Recommendations

M asked the tribunal to make recommendations that the employer put in place training and changes to various processes.  The tribunal concluded that it did not have power to make these recommendations as they would not have the required impact of obviating or reducing the adverse effect on M herself (given she would be remaining off work on PHI).  It rejected the contention that improvements to policies affecting colleagues at work would alleviate M’s anxiety or depression.  In any event the recommendations had already been put in place by the employer.

The suggested recommendation for an apology was also rejected, the tribunal agreeing that this was owed from a moral perspective but noting that, for an apology to be effective, it needs to be “genuine and heartfelt” rather than ordered.  The failure to apologise was instead taken into account in the award for aggravated damages.

Equal pay audit

Where there has been an equal pay breach, the tribunal is obliged to make an order for an equal pay audit unless one of the exceptions applies, namely that:

  • a compliant audit has already been done in the last 3 years,
  • it is clear, without an audit, if action is required to avoid further breaches,
  • there is no reason to think there may be other breaches,
  • the disadvantages of an audit would outweigh its benefits, or
  • the small or new employer exemption applies.

Following the liability decision in 2019, the employer had established a remediation programme in consultation with the FCA, including the preparation and annual review of job descriptions to sit within a new hierarchy of job levels, an annual equal pay review of fixed remuneration between those with similar roles in the same business line, a review of recruitment, performance review and assessment processes, and additional discrimination training for managers.  The employer did not intend to adopt pay transparency but would ensure employees had transparency of their own job level and the levels of colleagues they worked with.

The employer therefore sought to argue that it clearly understands what action is needed to prevent equal pay breaches without an audit, pointing to its voluntary annual equal pay reviews and remediation programme and claiming that historical anomalies had already been corrected.  It further argued that there was no reason for thinking there might be other breaches.  The tribunal rejected these arguments, noting that the employer’s pay practice fell significantly short of the recommendations in the EHRC statutory code of practice, in particular because “it chose to have an opaque pay system in common with other financial sector organisations” and therefore there were likely to be others in the same position as M.  The remediation programme was clearly moving in the right direction, but the tribunal felt it had to recognise that “significant cultural shifts take many years” and it was notable that the employer had chosen to retain an opaque pay system, albeit with the introduction of increased transparency around its job hierarchies.  The tribunal considered that it had not been given sufficient information about the methodology of the employer’s equal pay review, nor about how the employer would ensure that discrimination was avoided in relation to bonuses (which were not included in the review), to justify not requiring an audit.  It also rejected the employer’s argument that the disadvantage of an audit, of duplicating the work already being done in the review process, outweighed the benefit, given that the employer could decide to do just the audit and not its voluntary review.

The employer was therefore ordered to produce an equal pay audit, suitably anonymised, for the calendar year 2021 by 30 June 2022.  This is to cover base pay, pension contributions, discretionary bonuses and any other allowances (but not benefits in kind) for everyone employed for any part of 2021 (pro-rated for those only present for part of the year or working part-time).  The report will need to include the reasons for any identified difference in pay and for any potential equal pay breach identified, as well as a plan to avoid equal pay breaches occurring or continuing.  Once the tribunal is satisfied with the audit (and the tribunal can order £5,000 for each occasion of failure to comply with its orders), the audit has to be published on the employer’s website for at least 3 years and the employer must inform all current and former employees covered by the audit where to obtain a copy.

The potential for reputational damage and triggering of further equal pay claims as a result of publication of an audit is clear;  the ability of competitors to see pay information will also be concerning.  The case is a stark reminder that the risks of opaque pay systems will not necessarily be obviated by voluntarily putting in place an equal pay review process.

Anna Henderson
Anna Henderson
Professional Support Consultant, London
+44 20 7466 2819
Christine Young
Christine Young
Partner, London
+44 20 7466 2845

 

UK: regulators propose new diversity and inclusion requirements for financial services

28 February, 2022

The FCA, PRA and Bank of England (the regulators) have published a discussion paper (DP21/2) which aims to kick-start discussion on how the financial services sector, with the help of the regulators, can “accelerate the pace of meaningful change” in improving diversity and inclusion (D&I) within financial services firms.

The policy options being considered in DP21/2 include:

  • regular reporting of diversity data to the regulators;
  • the use of targets for representation;
  • measures to make senior leaders directly accountable for D&I in their firms;
  • linking remuneration to D&I metrics;
  • having a D&I policy, training on D&I and undertaking a diversity audit; and
  • the regulators’ approach to non-financial misconduct, and considering D&I in Senior Managers approvals and assessment of threshold conditions.

The discussion paper also focuses on the importance of data and disclosure in order to enable firms, regulators and other stakeholders to monitor progress.

DP21/2 is relevant to all regulated firms, including payment services and e-money firms, credit rating agencies and financial market infrastructure firms (FMIs). The regulators recognise that D&I will look different for different firms and will not apply a one size fits all approach to D&I.

The proposals in the discussion paper are potentially far-ranging, addressing people-related policies and practices, governance arrangements, accountability, remuneration arrangements, approach to customers and disclosure. Given the importance of the issues raised, the potential for significant change and the level of regulatory scrutiny being proposed, firms should actively engage in this discussion, which is open for response until 30 September 2021.

For more a detailed overview of the policy options proposed in DP21/2, please see our Financial Services team’s briefing here.

Update: February 2022

In February 2022 the Financial Services Culture Board (FSCB) and the Financial Services Skills Commission (FSSC) published a report setting out the findings of their survey of employees at 13 member firms in 2021, to help financial services firms measure perceptions of inclusion in their organisations. This recommended four actions firms can take to help improve inclusion:

  • measure inclusion as well as diversity ensuring different views can be gathered and assessed
  • develop and demonstrate a culture of listening to employee feedback and listening to and valuing feedback
  • maintain and demonstrate fair and transparent processes and systems
  • demonstrate strong leadership on inclusion.

Following the discussion paper outlined above, the PRA and the FCA have stated they intend to consult on more detailed proposals and publish a policy statement in 2022.

US: NYC Fair Chance Act updates challenge finance employers

11 October, 2021

In July, amendments to New York City’s Fair Chance Act took effect. They impose additional restrictions on how and when employers may request, review and use criminal background check information for hiring and employment decisions.

Many of these restrictions are either in direct or indirect conflict with regulations that require financial institution employers to conduct background check inquiries into a large majority of their employees. These regulations include Financial Industry Regulatory Authority background check requirements, Federal Deposit Insurance Corporation regulations and regulations relating to mortgage loan originators.

Although Fair Chance Act guidance advises that banking employers are exempt from complying with provisions that are directly in conflict with financial industry regulations, the line between direct and indirect conflict is not clear.

Moreover, New York City’s guidance also states that all exemptions will be construed narrowly.

Accordingly, these new amendments have left open questions for financial institutions on:

  1. Whether the Fair Chance Act applies to their background check process; in most cases, the answer is yes — at least some of the provisions will apply; and
  2. If the Fair Chance Act does apply, which specific provisions will be preempted by industry regulations.

In this article, we provide early best practices that have developed to address the second question, with the strong caveat that until there is further guidance and/or case law defining the scope of these exemptions, many of these questions will remain subject to interpretation.

Fair Chance Act Process and Amendments

The Fair Chance Act prohibits the majority of employers in New York City from making any inquiries about an applicant’s or employee’s arrest or criminal record before making a conditional job offer, and restricts when an employer can first seek criminal background information.

It also requires employers that wish to withdraw a conditional offer of employment based on an individual’s criminal record to partake in a multistep fair chance process before making a final determination.

The fair chance process involves providing the applicant or employee with notice and undertaking an individualized analysis that addresses seven relevant factors, including the public policy of New York state, the specific duties necessarily related to the position sought or held, the seriousness and age of the offense(s), and the employer’s interests. Then, the employer must provide the applicant/employee with the employer’s written analysis.

The July 2021 amendments significantly expand the scope of the statute’s protections by extending the fair chance process to cover decisions based on pending arrests and adverse actions against existing employees. The amendments also extend protections to independent contractors and freelancers.

In addition, the amendments expand the type of criminal history that employers are prohibited from asking about, restrict information that may be placed on job solicitations relating to background checks and require employers to affirmatively solicit applicant/employee input on the relevant fair chance factors.

Finally, the amendments clarify that an employer must conduct all other noncriminal preemployment screenings before a criminal background check is conducted — thus creating a bifurcated system for criminal and noncriminal background check information.

Financial Institution Employment Regulations

The Fair Chance Act requirements, including the bifurcated process, have led to questions on whether this impacts background checks in regulated industries.

FINRA

FINRA requires that regulated members investigate the good character, business reputation, qualifications and experience of an applicant before the employer seeks to register the applicant with FINRA, and this requirement has been interpreted to necessitate a national criminal background check.

FINRA also requires that applicants make specific disclosures relating to criminal convictions on the required Form U4, and that employers verify this information within 30 days after the Form U4 is filed.

Directly conflicting with the fair chance process, FINRA has listed disqualifying convictions, including any felony conviction within the past 10 years, as well as certain specified felony and misdemeanor convictions.

Clerical or ministerial employees are exempt from this background check requirement.

FDIC-Insured Banks

Institutions insured by the FDIC are prohibited from employing any person who has been convicted of a criminal offense involving dishonesty or breach of trust, unless specific consent is obtained from the FDIC.

Further, individuals convicted of certain financial crimes are subject to an outright prohibition of working in, owning or controlling an insured depository institution for 10 years.

FDIC institutions are required to perform a reasonable inquiry into an applicant’s history to avoid hiring someone with a covered conviction.

The FDIC does not mandate that employers conduct background checks as part of this inquiry, but most employers do conduct background checks to comply with this reasonable inquiry requirement.

Other restrictions on criminal history also apply to those individuals directly involved in mortgage loan origination.

Uncertainty for Employers

Most financial institutions have taken the defensible position that the fair chance process — which consists of the multistep analysis of whether a certain crime can be used to disqualify an applicant — need not be followed if the crime fits within one of the disqualifying convictions mentioned in applicable banking regulations.

The more difficult question becomes what other provisions of the Fair Chance Act do apply, with the understanding that any provisions not in direct conflict with the banking regulations must be followed, and that any exemption will be construed narrowly.

Based on early experiences, and again keeping in mind the uncertainty noted above, we recommend that financial industry employers comply with the following provisions of the Fair Chance Act to the extent possible:

  • Do not deny employment based on a non-conviction, although pending arrests may be considered assuming compliance with the fair chance process. Before rescinding any an offer due to a pending arrest, conduct a full fair chance analysis.
  • Do not ask about criminal history until after a conditional offer has been made, and make a conditional offer of employment subject to review of the criminal history information in the Form U4 and/or background check. Based on timing, this may not be feasible, and this potential risk must be weighed against conducting the check in a timely manner.
  • Engage in the fair chance process for a conviction that is not specifically disqualifying under banking regulations if there are plans to deny an offer based on that conviction.
  • Comply with all steps of and terms of the Fair Chance Act — including the fair chance process — for clerical or ministerial employees.

In any event, employers claiming an exemption from the Fair Chance Act should carefully document their decision-making process and their conclusion that an exemption applies.

Tyler Hendry
Tyler Hendry
Senior Associate, New York
+1 917 542 7866
Pamela Terry
Pamela Terry
Associate, New York
+1 917 542 7825

This article was first published by Law360 Employment Authority, here.