Rolling bad apples - mandatory reference checks spread to Singapore
23 June 2021
The driving force behind this proposal is the growing global regulatory recognition that there is a need to stop what has been termed “rolling bad apples” from moving from one firm to another. Increasingly, regulators are realising that to stop representatives and broking staff from moving on before being terminated requires preventing these staff members from trying to sanitise their conduct by moving to non-representative or non-broking roles within the industry.
Significant extension to the current regime of reference checks
The MAS’s proposal, contained in its Consultation Paper on Proposals to Mandate Reference Checks (issued 14 May 2021) is a significant extension of the existing regime under which only capital market licence holders, financial advisers and insurance brokers are required to conduct reference checks, and only in respect of their representatives and broking staff. The proposed extension of requirements is therefore far-reaching in terms of:
- which entities need to ask for references – all financial institutions and regulated entities
- what roles need references – most employees in senior management and risk functions
- who will need records of conduct – all employees except for those in ancillary positions
Conduct records for all except ancillary employees
If implemented as proposed, the Singapore regime will be broadly similar to the UK’s Senior Managers and Certification Regime (SMCR). While there are many similarities, the proposal has significant differences that raise a number of issues of implementation and execution which it is hoped will be addressed by the MAS.
In the UK, the requirement to certify under the SMCR means that firms must issue an annual certificate stating, among other things, that the employee is fit and proper to perform the function stated in the certificate. To meet this requirement, UK firms carry out assessment exercises annually, and keep records in order to maintain an audit trail that backs up the certification made. One key difference with the SMCR is that the MAS is only proposing that conduct records be kept for most employees, not that FIs/regulated entities certify the fitness and propriety of these employees.
The MAS has proposed that FIs/regulated entities maintain the same conduct records relating to an individual’s fitness and propriety as those that are required to be kept for representatives and brokers. This would include for example records relating to investigations, breaches of legal or regulatory requirements and misconduct reports filed with the MAS. It is, however, hard to see how compliance records of a “breach of regulatory requirements” or “investigations of wrongdoing” can meaningfully be maintained and applied to roles such as internal compliance or training or financial research roles (being examples of roles that an employee trying to sanitise their record might try to move into).
“So, why exactly did you decide on a change of role?”
The MAS notes some practical constraints faced by firms when hiring individuals from companies located outside Singapore or non-financial sectors. MAS proposes firms hiring such individuals for positions that need reference checks may proceed with the hire if they have unsuccessfully asked for references but deemed the employee to be suitable based on other due diligence checks. The same approach may have to be applied to individuals in financial firms but in roles for whom insufficient conduct records are available.
Additionally, where firms are seeking to hire former representatives and brokers who have moved into roles where there are no detailed conduct records, they may need as a practical matter to consider whether this in itself should be a factor in their assessment of whether that prospective hire is fit and proper for the role, especially if there is no adequate explanation for the move into the non-representative/broker role. Understanding why the prospect moved into the new role from the earlier one may therefore be an important part of the recruitment process, in addition to any other due diligence checks that should be carried out.
For a more detailed discussion summarising the proposal and discussing the implementation challenges please see our update Singapore’s Proposal to Mandate Reference Checks and Misconduct Reporting.