As part of its efforts to stop ‘rolling bad apples’, the Monetary Authority of Singapore (MAS) issued a Consultation Paper on 14 May 2021 which proposes to mandate reference checks for individuals employed by financial institutions (FIs) as senior managers or in risk taking and risk and management control functions (Reference Checks Consultation Paper). This extends MAS’ 2018 proposal to mandate reference checks for representatives (see our bulletin on the 2018 proposal here and MAS’ response to feedback here).

The Reference Checks Consultation Paper follows the recent conclusion of a consultation by the Hong Kong Monetary Authority (HKMA) which finalised the principles for the HKMA’s mandatory reference checking scheme (see our bulletin of 4 May 2021 here).

Submissions on the Reference Checks Consultation Paper close on 25 June 2021.

1. Extension of mandatory reference checks to other employees

MAS has observed that apart from representatives, the conduct of other employees has the potential to result in detrimental impact on an FI’s prudential soundness, reputation, customer’s interests or the public’s confidence in the financial industry. To mitigate the risk of ‘rolling bad apples’, which refers to individuals who engage in misconduct in one firm and then move on to another firm without disclosing their earlier misconduct to the new employer, MAS is proposing to extend mandatory reference checks beyond representatives to other employees of FIs.

2. Scope of the proposed mandatory reference checks

In keeping with MAS’ expectations under its Guidelines on Individual Accountability and Conduct (IAC Guidelines) that FIs conduct the necessary due diligence prior to appointing senior managers to ensure that they are fit and proper for their roles, MAS proposes to extend mandatory reference checks to individuals identified as ‘senior managers’, which includes those persons employed in an executive capacity by, and are principally responsible for the day-to-day management of, the FI, as set out in Annex A of the Reference Checks Consultation Paper. This list is similar to the list of core management functions set out in Annex B of the IAC Guidelines, with the addition of deputy CEO and/or resident manager.

In addition to senior managers, MAS is considering two options (see Table A below) to either fully align (option 1) or partially align (option 2) the mandatory reference checks scope with the scope of functions under MAS’ proposed Harmonised Expanded Power to Issue Prohibition Orders (see our bulletin here).

Table A: Options for scope of employees

Type of individuals Option 1 (broader scope) Option 2 (narrower scope)
Individuals in risk-taking functions Option 1 covers individuals responsible for taking actions that result in an FI undertaking any specified risk (credit risk, asset risk, liquidity risk, market risk, operational risk, technology risk, market conduct risk, money laundering/terrorism financing risk, legal risk, reputational risk, regulatory risk, and any other risks as may be specified by MAS) in the course of the FI’s business. Option 2 covers only individuals responsible for taking actions that result in an FI undertaking credit risk, asset risk, liquidity risk, market risk, market conduct risk, money laundering/terrorism financing risk, and any other risks as may be specified by MAS.
Individuals in risk management and control functions Option 1 covers individuals who are responsible for:

(a) the identification, assessment, monitoring and reporting of specified risks arising from the FI’s operations;

(b) the development and implementation of policies and procedures intended to ensure compliance by the FI with the relevant legal and regulatory requirements in the jurisdictions that it conducts business in; or

(c) the monitoring of, auditing of and/or reporting on compliance with policies and procedures intended to ensure compliance by the FI with the relevant legal and regulatory requirements in the jurisdictions that it conducts business in.

Option 2 covers only:

(a) the identification, assessment, monitoring and reporting of specified risks arising from the FI’s operations; and

(b) the development and implementation of policies and procedures intended to ensure compliance by the FI with the relevant legal and regulatory requirements in the jurisdictions that it conducts business in.

Individuals performing critical system administration Individuals performing critical system administration. Critical system administration refers to the maintenance or operation of a critical system by persons granted any privileged access to the critical systems. Same as option 1.

 

Individuals who can authorise or approve payments (excluding small payments) These are individuals with mandate to authorise or approve, the release of funds or the transmission of digital payment tokens, to facilitate payments by an FI or a customer of the FI, regardless of the counterparty to which the payment is made. Same as option 1.

The FIs in scope are wide ranging and include capital markets services license holders, licensed financial advisers, registered insurance brokers, banks, merchant banks, insurance companies, finance companies and licensed payment service providers, conducting regulated activities under MAS-administered legislation.

3. Mandatory information to be included in references

MAS proposes that the reference checks must cover certain mandatory information relating to the individual in the past five years. The lookback period is based on the number of calendar years and not years of employment. MAS had proposed a lookback period of ten years in its Consultation Paper on Mandatory Reference Checks for Representatives, so the alignment of the lookback period with existing record retention requirements in Singapore is a welcome change.

MAS proposes to require FIs to provide the mandatory information set out in Table B below no later than 21 calendar days from the date of receipt of a reference check request (this is a change from the 14-day period that was proposed in MAS’ Consultation Paper on Mandatory Reference Checks for Representatives). MAS proposes to require FIs to provide the individual with the right to view (but not a right to edit) the reference prepared upon the individual’s request. FIs will need to put in place an arrangement to allow such requests to be made by individuals and for the references prepared to be shared upon such request.

FIs are expected to take reasonable steps to request relevant information in instances when hiring individuals who are or were employees from companies located outside Singapore, non-financial sectors, or FIs in Singapore but outside the FIs in scope of the proposed mandatory reference checks. In such instances, FIs are to satisfy themselves of the fitness and propriety of the prospective employees. An FI can proceed with the recruitment if it has requested for the reference check and has deemed the prospective employee to be suitable for the position based on its other due diligence checks, notwithstanding the absence of a response to the reference check request or the response to a reference check request not containing sufficient information.

Table B: Details of information required by mandatory reference checks

Type of information required Details of information required
Information pertaining to the individual’s employment history with the FI Includes:

(a) the duration of employment;

(b) the roles and job functions of the individual (including last position held); and

(c) the reason for the cessation of employment, including but not limited to the following:

  • resignation;
  • resignation by paying compensation in lieu of notice prior to or during investigation;
  • termination;
  • dismissal; or
  • expiry of contract.
Compliance records relating to the individual’s fitness and propriety, unless there is risk of tipping-off the individual which may compromise the integrity of investigations Includes:

(a) concluded investigations with reasonable grounds to believe that a wrongdoing has been committed and the extent of consumer detriment (where applicable) resulting from the wrongdoing;

(b) ongoing investigations and the extent of consumer detriment (where applicable) resulting from the wrongdoing if substantiated;

(c) incidents where the FI has knowledge of, or reasonable grounds to believe that the individual has or may have been in breach of legal or regulatory requirements administered by MAS or any other law, while performing his or her duties or responsibilities as an employee of the FI, and the extent of consumer detriment (where applicable) resulting from the incident;

(d) disciplinary actions taken against the individual or would have been taken against the individual if the individual was still with the FI (where applicable); and

(e) whether misconduct reports were filed with MAS against the individual and, if so, details on the nature of misconduct committed and the extent of consumer detriment (where applicable) resulting from the misconduct.

Balanced scorecard grades (where applicable) Last four balanced scorecard grades assigned to the individual.
Persistency ratio of insurance policies (where applicable and available) Persistency ratio of insurance policies sold by the individual and the methodology used in computing the persistency ratio.

MAS also proposes that FIs maintain records of the mandatory information set out in Table B above for all employees, with the exception of ancillary service personnel such as drivers, food and beverage personnel and clerical personnel, for a minimum period of five years.

Furthermore, FIs will be expected to:

(a) establish policies and procedures governing its investigation and disciplinary process;

(b) communicate the policies and procedures to all employees upon employment, and make the information accessible on an ongoing basis;

(c) conduct a fair and objective internal investigation and disciplinary proceeding in a prompt manner where there are reasonable grounds to believe that an employee has breached the FI’s internal policies and procedures or laws and regulations applicable to the FI or individuals (in relation to their duties and responsibilities in the FI); and

(d) ensure proper documentation of the investigation and disciplinary proceedings, including evidence collected, interviews conducted and grounds of decisions.

FIs should also give the employee an opportunity to explain or defend himself or herself against the allegations during the investigation and disciplinary process.

MAS proposes to effect the mandatory reference checks requirements in the form of Notice(s) issued under relevant legislation. MAS proposes to give a transition period of six months, i.e. six months after the Notice(s) issued under the relevant legislation is published.

4. Concluding thoughts

No legal immunity will be available to FIs to absolve them of liability arising from their responses to reference check requests. Accordingly, FIs should be mindful that employers owe a duty of care to their employees, whether former or present, when preparing a performance reference, as was held in of the case of Ramesh s/o Krishnan v AXA Life Insurance Singapore Pte Ltd [2016] 4 SLR 1124. The Singapore Court of Appeal also held in that case that when writing a reference for its employee, an employer has to exercise reasonable care to ensure that:

(a) the facts stated in the reference are true and accurate; and

(b) any opinions expressed therein are based on, and supported by, facts which are true.

Employers also have to exercise reasonable care to ensure that a reference does not give an unfair or misleading overall impression of an employee because it fails to present the full picture, even if the discrete pieces of information contained in the reference are factually correct.

FIs will need to ensure that they exercise reasonable care in preparing and communicating references that are accurate, objective, clear, balanced and based on verifiable facts. FIs should not selectively disclose information, if withholding certain information will render the reference incomplete, inaccurate or unfair. References should be given in good faith and without malice.

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, use, disclosure and retention of personal data, document retention and data access requests and confidentiality and separation agreements.

 

Natalie Curtis
Natalie Curtis
Partner
+65 6868 9805
Fatim Jumabhoy
Fatim Jumabhoy
Partner
+65 6868 9822
Kenneth Lo
Kenneth Lo
Associate
+65 6868 9827
Sandra Tsao
Sandra Tsao
Director (Prolegis LLC)
+65 6812 1353

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a foreign law practice in Singapore. Where advice on Singapore law is required, we will refer the matter to and work with licensed Singapore law practices where necessary.