13 May, 2020
On 8 May 2020, the Hong Kong Monetary Authority (HKMA) commenced a three-month industry consultation on a proposed framework for a mandatory reference checking scheme (MRC Scheme) to address the phenomenon of “rolling bad apples” moving between financial institutions without disclosing previous misconduct to their new employer.
Through the MRC Scheme, the HKMA has indicated that it intends to establish a common protocol for reference checking which helps enhance the disclosure of employment history of prospective employees to future employers.
Importantly, the HKMA has proposed that the MRC Scheme will initially only apply to:
The HKMA has also proposed that references should cover ten years of an individual’s employment history, and that the MRC Scheme be implemented as an industry-led initiative with the endorsement of the HKMA, rather than imposed as a supervisory requirement.
The MRC Scheme proposed by the HKMA builds on global, regional and local developments. On a global level, the Financial Stability Board (FSB)’s April 2018 toolkit to address misconduct risk identified “rolling bad apples” as one of three key areas relevant to reducing misconduct in financial institutions (see our 24 April 2018 bulletin). Regionally, the Monetary Authority of Singapore (MAS) consulted in 2018 on a similar reference check proposal (see our 17 July 2018 bulletin).
Locally, the Securities and Futures Commission (SFC) last year introduced an internal investigation disclosure requirement to address the phenomenon of “rolling bad apples” (see our bulletins of 4 February 2019, 22 May 2019, 6 June 2019 and 19 June 2019). |
Herbert Smith Freehills has been an industry leader on governance and misconduct issues, having been involved in the development of the FSB toolkit and 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 webinar in conjunction with ASIFMA to share our insights on how these developments will impact the banking industry in Hong Kong and form part of broader conduct and culture-focused reforms across the Asia-Pacific region. An invite will be sent out shortly.
Date: Tuesday, 26 May 2020 Time: 9:00am to 10:00am |
The MRC Scheme proposed by the HKMA would oblige “recruiting” banks (ie, those looking to employ a particular individual) to do the following before deciding to hire a new employee:
Under the proposed MRC Scheme, reference providing banks should:
The HKMA has also proposed that where a reference providing bank receives a request relating to a current or former employee which is the subject of an ongoing investigation, the reference providing bank may provide information relating to the investigation or disciplinary action, but care must be taken not to disclose premature or inconclusive information which may stigmatise a presumed innocent individual. However, if an employee is subsequently found to be guilty of misconduct or other misconduct issues are uncovered which substantively change the reference provided, the reference providing bank should update the recruiting bank. |
HKMA regulated banking sector
As noted above, the proposed MRC Scheme will initially apply only to AIs (including RIs) – ie, banks regulated by the HKMA. The HKMA has proposed that there be no obligation for recruiting banks to obtain references from all current and former employers where those current / former employers are not HKMA regulated AIs or do not have a presence in Hong Kong.
Specified categories of AI employees
The HKMA has proposed that there be two phases of implementation, with Phase 1 covering the following senior management positions:
The HKMA has suggested that Phase 2 will have a significantly broader scope, and would cover the following AI / RI 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):
The HKMA has proposed that a review of Phase 1 take place one year after implementation, and that the approach taken to Phase 2 will be shaped by feedback from Phase 1.
Duration of reference check information
It is 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.
AIs should therefore maintain employment records of their employees for at least 10 years from the date of departure. |
The HKMA has proposed the development of a standard information template (which is included as Annex 2 to the consultation paper) to ensure consistency in the reference checks. The proposed template includes matters such as the reason for the employee’s cessation of employment, and whether the employee:
Notably, the HKMA has proposed that reportable internal disciplinary actions would include those resulting from misconduct similar in nature to those specified in (a), (b) and (c) above, and other gross misconduct such as fraud and serious criminal offences.
In contrast to the SFC’s internal investigation disclosure obligation, the HKMA has proposed a materiality threshold for matters disclosed in these references by suggesting that disciplinary actions arising from misconduct of a minor nature (such as minor breach of internal staff code such as repeated losses of staff card) and performance related matters (such as consistently poor performance) need not be reported.
Other internal disciplinary actions which the HKMA has proposed should be reported are internal warnings, reduction or claw-back of remuneration including salary, commissions, bonuses, etc and suspension and dismissal as a result of misconduct. |
For further information, please contact:
William Hallat, Herbert Smith Freehills
william.hallatt@hsf.com