July 29th, 2015 | Sterling

FCA Imposes In-Depth Background Checks For Financial Firms

Bankers be advised, the Financial Conduct Authority (FCA) is tightening background screening requirements for financial traders. On 7 July 2015, the FCA released a consultation paper (CP15/22) on Strengthening accountability in banking: Final rules (including feedback on CP14/31 and CP15/5) and consultation on extending the Certification Regime to wholesale market activities. This is on the heels of the implementation of new, tighter FINRA regulations impacting financial firms in the US.

Businesses involved in the banking sector, building societies, credit unions, and PRA- designated investment firms are affected by the rules and regulations defined in the consultation paper. This includes any branches of overseas firms that operate within the UK. In total, an additional 150,000 traders and financiers will be covered under the new regulations.

The final rules, as published by the FCA, outline three specific areas where firms will be most affected. These three key components address elements of accountability, staff assessment and expected conduct or behaviour.

INCREASING MANAGERIAL ACCOUNTABILITY
One of the primary objectives of CP15/22 is to increase accountability among senior managers for any misconduct carried out by the areas they oversee. The Senior Managers Regime (SMR) imposes a set of responsibilities for individuals who hold managerial roles within a firm. Firms should prepare for the new regime by developing policies and statements that outline individual responsibilities for senior managers.

REDUCING RISKS WITH EMPLOYEE BACKGROUND SCREENING
CP15/22 also introduced a Certification Regime (CR) to aid in reducing the risk of harm to firms and their customers. The CR requires firms to assess the fitness and propriety of certain employees. Specifically, the candidate or employee must satisfy specific requirements relating to his or her qualifications, training, competence and personal characteristics. Under the new regime, firms will also be required to re-assess and issue annual certificates for certain employees.

Regulators have always expected firms to vet candidates for senior management; however, these new regulations formalize the process for all relevant businesses within the financial sector. The new regime doesn’t stop short at senior management and also requires assessments of more junior employees. Stay tuned for updates from the FCA regarding which employee types will be affected.

The new regulations attempt not only to increase the number of employees who are background screened, but also the depth of the investigation. Once the new regime commences, firms will be accountable to the regulators for adequately assessing the fitness and propriety of staff. The FCA recommends that firms prepare for the new regime by developing policies and procedures for conducting staff assessments.

OUTLINING EXPECTED BEHAVIOUR THROUGH NEW CONDUCT RULES
The FCA set out a basic standard for behaviour under the new conduct rules. Any staff that are subject to the SMR or CR will be expected to meet the new conduct rules once the new regime is in effect. After that, firms will be granted an additional year to apply the conduct rules to other staff. Firms can prepare by ensuring staff are aware of the new conduct rules and their date of commencement.

The new rules and corresponding enforcement is scheduled to take effect on 7 March 2016 giving financial firms time to evaluate their current background screening practices and follow the preparation advice offered by the FCA. Firms can also reach out to SterlingBackcheck for assistance in preparing for the new requirements and developing effective, compliant screening programmes.

This publication is for informational purposes only and nothing contained in it should be construed as legal advice. We expressly disclaim any warranty or responsibility for damages arising out this information. We encourage you to consult with legal counsel regarding your specific needs. We do not undertake any duty to update previously posted materials.