US: NYC Fair Chance Act updates challenge finance employers

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 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.

Hong Kong Monetary Authority finalises principles for mandatory reference checking scheme to address “rolling bad apples” phenomenon

Following a three-month industry consultation period, the Hong Kong Monetary Authority (HKMA) has released the Consultation Conclusions Paper on Implementation of Mandatory Reference Checking Scheme to Address the “Rolling Bad Apples” Phenomenon (Consultation Conclusions) dated 3 May 2021.

Through the mandatory reference checking scheme (MRC Scheme), the HKMA will establish a common protocol for reference checking to help enhance the disclosure of the employment history of prospective employees to future employers.

The HKMA received a total of seven submissions, including from the Privacy Commissioner for Personal Data, Hong Kong (PCPD).

Having taken into account industry feedback, the HKMA has adopted several key changes to the MRC Scheme since the Consultation Paper was published on 8 May 2020. These changes include:

  • narrowing the scope of personnel covered by Phase 2 of the MRC Scheme;
  • shortening the mandatory reference checking (MRC) period from 10 years to 7 years;
  • providing flexibility for the industry to further discuss and determine how ongoing investigations are to be reported, in order to strike a balance between mitigating legal risks and effectively addressing the risks of hiring “bad apples”; and
  • lengthening the response time to an MRC request from 10 working days to 1 month.

The HKMA has proposed that an industry working group (IWG) be set up to work out the operational details of the MRC Scheme in accordance with the principles set out in the Consultation Conclusions, including practical guidance on what constitutes reportable information. Further detail is set out below.

The IWG is expected to deliver the operational details by November 2021. The HKMA has not confirmed the precise timeline for implementation of Phase 1 of the MRC Scheme, and has instead said that the IWG may further deliberate on the detailed implementation timeline in consultation with the HKMA.

Joint webinar with ASIFMA on 20 May 2021

HSF has been working closely with ASIFMA in providing comments to the HKMA’s Consultation Paper, many of which were taken up by the HKMA.

HSF has been an industry leader on governance and misconduct issues, having been involved in the informal consultation on the SFC’s internal investigation disclosure requirement. We also advised ASIFMA on its response to the SFC’s internal investigation disclosure obligation, as well as MAS’ reference check proposal.

We will be holding a joint webinar with ASIFMA to share our insights on how the HKMA’s MRC Scheme will impact the banking industry in Hong Kong, and what we can expect from the regulator moving forward.

Date: Thursday, 20 May 2021

Time: 2:00 – 3:00pm (Hong Kong / Singapore time)

To register for the webinar, please click here.

Scope of application of MRC Scheme – specified categories of AI employees

As mentioned in our 12 May 2020 bulletin, the HKMA has proposed that there be two phases of implementation of the MRC Scheme, with Phase 1 covering the following senior management positions:

  • directors, chief executives (CEs) and alternate chief executives (ACEs) approved under section 71 of the Banking Ordinance (BO);
  • managers notified to the HKMA under section 72B of the BO; and
  • executive officers (EOs) approved under section 71C of the BO.

In addition, the HKMA has added to Phase 1 responsible officers (ROs) approved under the Mandatory Provident Fund Schemes Ordinance (MPFSO) and ROs under the Insurance Ordinance (IO), on the basis that ROs under the IO and MPFSO are important roles in authorised institutions (AIs) who are usually expected to be appointed on a long-term basis.

In the initial Consultation Paper, Phase 2 was envisioned to be significantly broader than Phase 1, covering AI employees heading key supporting functions or who have client facing or sales responsibilities (where any misconduct by them would have a direct impact on end customers).

Following industry feedback, the HKMA has made welcome changes to refine the scope of Phase 2, by removing heads and deputy heads of key supporting functions, as well as client facing staff who provide general banking services and products (ie, bank branch managers, tellers and customer relationship representatives). The HKMA has now specified that Phase 2 will only cover “individuals who are registered or licensed with financial regulators” (who are not otherwise captured by Phase 1 of the MRC Scheme). In other words, the revised coverage of Phase 2, in addition to personnel covered in Phase 1, would be:

  • staff licensed to carry out securities related regulated activities under the Securities and Futures Ordinance (SFO);
  • staff licensed to carry out insurance related regulated activities under the IO; and
  • staff registered to carry out regulated activities under the MPFSO.
Duration of reference check information

The Consultation Paper initially proposed that the duration of reference check information should cover the prospective employee’s employment records in the previous 10 years up to the date of application for employment. This is consistent with the HKMA’s existing requirement that applicants for directors, CEs, ACEs and EOs of AIs disclose information relating to the past 10 years of employment.

However, the HKMA is of the view that the period can be reduced to 7 years for both Phase 1 and Phase 2 employees (subject to further deliberation of the IWG), to align with existing industry practice around employment record retention. The IWG may work out suitable transitional arrangements for AIs which may not have retained records for a 7 year period upon the implementation of the MRC Scheme.

Information to be provided by current or former employers

In contrast to the SFC’s internal investigation disclosure obligation, the HKMA has proposed a materiality threshold for matters disclosed in these references. Whilst the HKMA is of the view that a quantifiable threshold of severity may not be applicable in all circumstances, the HKMA agrees that reportable information should be confined to that which is material or serious in nature and should generally fall under the following categories:

  • breach of legal or regulatory requirements relating to the BO, IO, MPFSO and SFO;
  • incidents related to honesty, integrity or matters of a similar nature;
  • misconduct reports filed with the HKMA;
  • internal or external disciplinary actions arising from conduct matters; and
  • additional information relevant to the fit and proper assessment of prospective employees.

The HKMA has said that more practical guidance on what constitutes reportable information can be further deliberated by the IWG.

Disclosure of ongoing investigations

With regard to the disclosure of ongoing investigations, the HKMA has noted that “the issue of the reporting of ongoing investigations could be further deliberated by the IWG”, but has nevertheless also stated that “if all ongoing and incomplete investigations are excluded, it may give rise to a potential loophole for the ‘bad apples’…

As such, the HKMA has made clear in the Consultation Conclusions that reference providing AIs should provide information about ongoing investigations with allegations that are of serious nature, as well as those which are about to conclude with disciplinary action. The MRC information provided may include basic information about the allegations and the state of the investigation.

In respect of provision of updates related to ongoing investigations, the HKMA has stated that reference providing AIs should provide an update to a recruiting AI on concluded investigations within one month after the cases are concluded.

Negative MRC information

The Consultation Paper discusses whether there would be any legal or regulatory consequences for recruiting AIs who choose to hire an individual despite negative MRC information and past misconduct. In this regard, the HKMA has noted that except for the appointment of senior positions that require regulatory approvals, AIs will have full discretion over their employment decisions. If AIs hire an individual notwithstanding negative MRC information, AIs should document the rationale and justification for the hiring decision.

Opportunity to be heard

The HKMA also noted that “most of the respondents considered that AIs should not be obliged to provide an opportunity to be heard to the prospective employee” on the grounds of possible tipping off, compromising the quality of ongoing investigations and the potential breach of secrecy obligations.

However, the HKMA has maintained that on the grounds of fairness, an opportunity to be heard should generally be provided to prospective employees, including but not limited to cases where the misconduct incident has been substantiated, or where external or internal disciplinary actions have been taken against the individual. From an employment law perspective, AIs should be aware of the risk that this may practically lead to the previous investigation being reopened, or complaints of unfair processes from the individual employee in question.

As for cases where there are legal impediments for disclosure to the prospective employee in the course of providing an opportunity to be heard (such as alleged misconduct cases that are still under confidential investigation, cases involving sensitivity concerning secrecy or potential tipping off, and cases with other potential legal implications), the HKMA has said that it would be appropriate for the proposed IWG to consider the practical issues in more detail taking into account views from the PCPD.

Timeframe for responding to MRC request

The HKMA has extended the timeframe for reference providing AIs to respond to an MRC request from 10 working days to a month (from the day the MRC request is made by the recruiting AI). This change is in response to industry feedback which suggested that 10 working days would not be sufficient for AIs with a lean HR department, where handling of staff records involve multiple functional departments.

The recruiting AI would be considered to have discharged its obligations under the MRC Scheme if it does not receive any MRC information from the reference providing AI after one month or a longer period mutually agreed by both parties.

Industry working group

As mentioned above, the HKMA has proposed that the Hong Kong Association of Banks set up the IWG to work on the operational details of the MRC Scheme.

Specifically, the HKMA has suggested that the IWG can:

  • prepare guidance on what constitutes reportable information and the types of ongoing investigations that should be included and excluded from the MRC;
  • develop a standard written consent template to be used by recruiting AIs with prospective employees;
  • provide a platform for gathering industry feedback on MRC implementation issues;
  • consider the feasibility of a central register for the MRC Scheme to be developed and operated by the industry; and
  • escalate instances of non-compliance (eg, in cases where there is a repeated failure of a particular AI to respond to MRC requests) to the HKMA for follow-up.
Timeline and next steps

The IWG is expected to deliver the operational details of the MRC Scheme by November 2021 (ie, within 6 months of the publication of the Consultation Conclusions). On the timeline for the implementation of Phase 1 of the MRC Scheme, the HKMA noted the industry’s request for a transition period to commence upon the HKMA’s endorsement of the operational details proposed by the IWG so as to allow sufficient time for AIs to set up their internal processes and procedures for the MRC Scheme. However, the HKMA has not confirmed the precise timeline and has instead said that the IWG may further deliberate on the detailed implementation timeline of the MRC Scheme in consultation with the HKMA.

From an employment law perspective, employers will need to revisit practices from the hiring to separation phases during the transition period. This will include processes and documentation relating to conditional offers of employment, collection and use of personal data, document retention and data access requests and confidentiality and separation agreements.

A Phase 1 review will be conducted two years after the implementation of Phase 1, and a consultation on Phase 2 would be conducted in conjunction with the Phase 1 review, before the implementation of Phase 2. Subject to the outcome of the review of Phase 1 and the corresponding consultation on Phase 2, the implementation details of Phase 2 will be formulated accordingly.

Hannah Cassidy
Hannah Cassidy
Partner, Head of Financial Services Regulatory, Asia
+852 2101 4133
Natalie Curtis
Natalie Curtis
+65 6868 9805
Tess Lumsdaine
Tess Lumsdaine
Senior Consultant, Hong Kong
+852 2101 4122
Isabelle Lamberton
Isabelle Lamberton
Registered Foreign Lawyer (New South Wales, Australia)
+852 2101 4218

UK: restricting recruitment to internal ‘talent pool’ could be discrimination

Employers should assess the potential for indirect discrimination claims when deciding to limit access to certain benefits or opportunities to a particular pool of employees.  Where this puts a protected minority group at a disadvantage even inadvertently, an employer will need to be able to show that its policy was a proportionate means of achieving a legitimate aim.

In Ryan v South West Ambulance Services NHS Trust, the employer created a ‘talent pool’ consisting of employees with top appraisal grades and those whose self-nomination was accepted.  The idea behind the pool was to identify future leaders and managers who would benefit from additional development opportunities and it was used as a first resort to fill internal vacancies quickly.  In practice the pool included a significantly lower percentage of employees aged 55-70 than were in the whole workforce and therefore this age group suffered a disadvantage. The claimant suffered this same disadvantage as she was within the age band and not in the talent pool, and was therefore prevented from applying for two vacancies at the same level as her current role.

The EAT held that this was indirect age discrimination.  The employer had failed to show that the claimant would have been put in the talent pool had she self-nominated or appealed her appraisal grade, and therefore it could not be said that it was her failure to do those things that had prevented her from being in it. It had failed to prove that the discriminatory effect of the rule was not at play.

The employer had also failed to show that the use of the policy was justified.  This would have required the employer to show that the two positions needed to be filled quickly and that this could not have been achieved by less discriminatory means, for example by allowing applicants from outside the pool where they had previously interviewed for the role and were on the same pay band.

Anna Henderson
Anna Henderson
Professional Support Consultant, Employment, London
+44 20 7466 2819

UK: gender pay gap reporting deadline passes, new guidance published

The deadline for the second year’s gender pay gap reports has now passed, with roughly the same number of employers as last year’s total meeting the deadline (and almost half of them doing so in the last week).  Just over half of private companies have reported gaps that are higher or no lower than last year’s, which is unsurprising given that, even if employers have taken measures to narrow the gap, these are likely to take time to show results.  However, commentators have used the lack of progress to urge the Government to make mandatory the publication of action plans to narrow the gap, a call that to date has been resisted by the Government (see here).

There is plenty of guidance available for employers looking for ways to try and improve their figures for next year.  In addition to recommendations from the EHRC and a parliamentary select committee (see here), the Government Equalities Office recently published two sets of guidance, Eight ways to understand your gender pay gap and Four steps to developing a gender pay gap action plan, along with an action note and infographic summarising the evidence based actions employers can take to support women to progress, to help to close the gender pay gap and increase gender equality in the workplace.  The Women and Work All Party Parliamentary Group have also launched How to recruit women for the 21st Century (see here for further details) which, among other recommendations, calls on the government to commission or publish new guidance for employers on positive action.

Employers are not currently required to report on the ethnicity pay gap; a Government consultation on introducing such a duty closed at the end of January 2019 and its response is awaited.  In the meantime, a number of large employers have signed up to a pledge to report voluntarily, organised by Involve, which has published a Framework for Ethnicity Pay Gap Reporting to assist employers – available here.

Anna Henderson
Anna Henderson
Professional Support Consultant, London
+44 20 7466 2819

UK: pay gap reporting – yet more guidance on gender reports

With the second deadline for gender pay gap reports a month away, more guidance has been published (in addition to that covered here). The Government Equalities Office has published two sets of guidance, Eight ways to understand your gender pay gap and Four steps to developing a gender pay gap action plan, to help employers close their gender pay gaps. The first proposes a set of questions focussing on potential gender imbalance in recruitment, promotion or retention, starting salaries/other particular aspects of pay, or performance rating. It also suggests that employers ask whether there is sufficient support for part-time employees to progress, and whether both men and women with caring responsibilities are supported, stating that employers may wish to enhance pay for shared parental leave to encourage men to take it and to advertise all jobs as flexible by default. The second guide highlights the need for buy-in from senior people and the involvement of a wide range of stakeholders in developing an action plan, and emphasises the need for specific, time-bound targets and a named individual to drive the plan forward.

The Women and Work All Party Parliamentary Group has also launched How to recruit women for the 21st Century, a new toolkit to support female progression in the workplace. Suggestions include the introduction of name-blind and context-blind applications, avoiding asking applicants about their current salary, and adopting a flexible working culture to improve the pipeline. It also calls on the government to commission or publish new guidance for employers on positive action.

The Labour Party has pointed to more flexible work as essential to close the gender pay gap, to facilitate working women and also encourage caring responsibilities to be spread more equally across the genders. Dawn Butler has stated that Labour would give employees the right to work flexibly from day one of a job (currently the right to request flexible work is available after 26 weeks) and create a presumption that work can be done flexibly which it would be for employers to rebut.

Anna Henderson
Anna Henderson
Professional Support Consultant, London
+44 20 7466 2819

Recruitment and protection of talent: a boardroom issue for pharma

Our article Recruitment and protection of talent: a boardroom issue for pharma is available on our pharma hub here. Technological advancement is key amongst the forces driving change in the pharmaceutical healthcare sectors, with businesses increasingly partnering with non-traditional players such as tech giants, agile biotech start-ups and insurers. In this article we explore how the industry’s increasing focus on tech, including AI, will give rise to a corresponding need to find innovative solutions to attract, retain and incentivise talent experienced in those areas, given the relatively small and highly mobile pool of potential recruits. We also consider the scope for businesses to protect their valuable knowhow and intellectual property from potential threats from ex-employees. Given the critical importance of talent to the pharma industry, we highlight issues that should be factored into strategic decision-making by the board, influencing choices on collaboration, acquisition and business location.

UK: withdrawal of job offer due to sickness absence was unlawful disability discrimination

Employers who receive a reference detailing a potential recruit’s significant absence levels in their last job risk a disability discrimination claim if they withdraw the offer for that reason without making further enquiries about the individual’s health and possible reasonable adjustments (from occupational health advisors, the referee, and/or the recruit). Although the employer in South Warwickshire NHS Foundation Trust v Lee had a legitimate aim of recruiting an individual capable of carrying out the role, withdrawal of the job offer on receipt of such a reference without making further enquiries had not been a proportionate means of achieving that aim. It is also worth noting that the employer had received a second negative reference focussing on the individual’s performance and capabilities unrelated to health. The employer would not have been liable had it relied only on that reference and been able to prove this (eg, through a contemporaneous record of its reasons for withdrawing the offer).