On May 14, 2021, the Monetary Authority of Singapore (MAS) issued a Consultation Paper on Proposals to Mandate Reference Checks (Consultation Paper). In the Consultation Paper, the MAS proposes to introduce mandatory reference check requirements (Proposed Requirements) on financial institutions, including licensed and/or registered fund management companies (FMCs), in relation to their prospective hires.
The Consultation Paper is an extension of the MAS’s proposal in July 2018 requiring financial institutions to conduct reference checks in relation to prospective representatives . The rationale for this extension arises from the inherent potential which the conduct of other employees, apart from representatives, has to create detrimental impact on customers’ interests or on a financial institution’s prudential soundness and reputation or even affect public confidence and trust in the financial industry. The MAS is looking to introduce the Proposed Requirements to stem “rolling bad apples,” referring to individuals who engage in misconduct in one firm, then move on to another firm without disclosing the earlier misconduct to the new employer.
Note that the practice of conducting reference checks is not new in Singapore. However, the MAS has observed differing standards across financial institutions’ practices when conducting and responding to reference check requests. In this connection, the MAS recognizes the need for, and hence is introducing, a mandatory minimum standard for such reference checks.
The details of the Proposed Requirements are summarized below. This briefing focuses on the Proposed Requirements insofar as they are applicable to FMCs.
||Scope of Prescribed Employees
- It will be mandatory for FMCs to conduct reference checks on their prospective representatives and prospective prescribed employees (as described below) (such representatives and prescribed employees, Prescribed Persons). The requisite information to be provided pursuant to such reference check requests is provided under Row 4 below.
- These prescribed employees refer to senior managers, that is, persons employed in an executive capacity by, and principally responsible for the day-to-day management of, the FMC.
- In addition to the abovementioned senior managers, the MAS is considering two options for the scope of employees where FMCs also need to perform reference checks and respond to reference check requests.
- Employees who are
(a) individuals in risk-taking functions:
These are individuals responsible for taking actions that result in the FMC’s taking any specified risk in the course of the FMC’s business;
(b) individuals in risk management and control functions:
These are individuals who are responsible for
(i) the identification, assessment, monitoring and reporting of specified risks arising from the FMC’s operations;
(ii) the development and implementation of policies and procedures intended to ensure compliance by the FMC with the relevant legal and regulatory requirements in the jurisdictions that it conducts business in; or
(iii) the monitoring of, auditing of and/ or reporting on compliance with policies and procedures intended to ensure compliance by the FMC with the relevant legal and regulatory requirements in the jurisdictions that it conducts business in.
(c) 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.
(d) individuals who can authorize or approve payments (excluding small payments):
These are individuals with mandate to authorize or approve the release of funds to facilitate payments by the FMC, regardless of the counterparty to which the payment is made.
- Under Option 2, the scope of employees subject to reference check requirements would be narrower. This option focuses on functions that can directly cause or result in financial risks to FMCs or customers. Specifically, compared with Option 1, Option 2 excludes the following individuals:
(a) with respect to individuals in risk-taking functions (as described under paragraph under Option 1 above), individuals responsible for taking actions that result in an FMC undertaking operational risk, technology risk, legal risk, regulatory risk, or reputational risk in the course of the FMC’s business
(b) with respect to individuals in risk management and control functions (as described under paragraph (b) under Option 1 above), individuals responsible for auditing the FMC’s compliance with policies and procedures introduced pursuant to the relevant legal and regulatory requirements in the jurisdictions where it conducts business
- Reference checks conducted must cover certain mandatory information relating to the Prescribed Person’s records (as described in Row 4 below) in the past five years.
- Where a Prescribed Person requests his or her prospective employer to maintain the confidentiality of the job-seeking process from his or her current employer, the prospective employer may conduct the reference checks after the Prescribed Person’s employment has ceased with his or her current employer. Under such a scenario, the prospective employer would still be able to make an offer to the Prescribed Person without a reference check if it has deemed the Prescribed Person to be suitable for the position based on its other due diligence checks. Nonetheless, if the FMC subsequently receives an unsatisfactory reference check response, the FMC should have the discretion to take appropriate actions – including withdrawing the employment offer or informing the Prescribed Person that the offer condition has not been satisfied .
||Minimum Mandatory Information and Right to View
- Mandatory information that FMCs would be required to provide for reference checks:
(a) information pertaining to the Prescribed Person’s employment history with the FMC, including
(i) duration of employment
(ii) roles and job functions of the Prescribed Person (including last position held)
(iii) reason for the cessation of employment, including but not limited to the following:
- resignation by paying compensation in lieu of notice prior to or during investigation
- expiry of contract
(b) compliance records relating to the Prescribed Person’s fitness and propriety, unless there is risk of tipping off the Prescribed Person, which may compromise the integrity of investigations, including but not limited to records concerning the following:
- (i) concluded investigations with reasonable grounds to believe that a wrongdoing has been committed and the extent of consumer detriment resulting from the wrongdoing
(ii) ongoing investigations and the extent of consumer detriment resulting from the wrongdoing if substantiated
(iii) incidents where the FMC has knowledge of, or reasonable grounds to believe that the Prescribed Person has or may have been in breach of legal or regulatory requirements administered by the MAS or any other law while performing his or her duties or responsibilities as an employee of the FMC and the extent of consumer detriment resulting from the incident
(iv) disciplinary actions taken against the Prescribed Person or that would have been taken against him/her if the Prescribed Person were still with the FMC
(v) whether misconduct reports were filed with the MAS against the individual and, if so, details on the nature of misconduct committed and the extent of consumer detriment resulting from the misconduct
(c) last four balanced scorecard grades assigned to the Prescribed Person (relevant if the Prescribed Person was engaged in providing financial advisory service)
- FMCs must provide the mandatory information set out above no later than 21 calendar days from the date of receipt of a reference check request.
- FMCs should ensure that information provided in response to reference checks is accurate, objective, clear, balanced, and based on verifiable facts. References should not be based on unsubstantiated allegations or mere suspicions that are not based on reasonable grounds.
- FMCs will be required to provide the Prescribed Person with the right to view the references prepared upon the Prescribed Person’s request. FMCs should put in place an arrangement to allow such requests to be made by Prescribed Persons and for the references prepared to be shared upon request.
||Cross-Sector and Cross-Border Application
- MAS acknowledges that FMCs may face practical constraints when performing reference checks on prospective Prescribed Persons, such as when hiring individuals who are or were employees of companies located outside Singapore, nonfinancial sectors, or financial institutions in Singapore but outside the scope of financial institutions as covered under the Proposed Requirements.
- In such circumstances, FMCs are expected to take reasonable steps to request relevant information and satisfy themselves of the fitness and propriety of the prospective Prescribed Persons. An FMC can proceed with the recruitment if it has requested the reference checks and has deemed the prospective Prescribed Person to be suitable for the position based on its other due diligence checks, notwithstanding the absence of a response to the reference check requests or reference checks containing insufficient information.
- FMCs should maintain records of information specified in Row 4 above pertaining to all employees (including representatives), with the exception of ancillary service personnel such as drivers, food and beverage personnel, and clerical personnel, for a minimum period of five years, once the reference check requirements take effect.
||Investigation and Disciplinary Process
- Where there are deviations from policies, procedures, laws, and/or regulations applicable to the FMCs and their employees (in relation to their duties and responsibilities in the FMC), the relevant parties should independently investigate, report, and address them.
- In addition, a framework should be established to provide guidance on the actions that could be taken against employees who have breached policies, procedures, and/or regulations.
- In this regard, FMCs are 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 FMC’s internal policies and procedures or laws and regulations applicable to the FMC or individuals (in relation to their duties and responsibilities in the FMC)
(d) ensure proper documentation of the investigation and disciplinary proceedings, including evidence collected, interviews conducted, and grounds of decisions
- FMCs should also give employees the opportunity to explain or defend him- or herself against the allegations during the investigation and disciplinary process.
||Mode of Implementation
- The Proposed Requirements will be introduced by way of notice(s) issued under the relevant legislation.
- Accordingly, noncompliance with the Proposed Requirements would be a breach of legal requirements and subject to regulatory enforcement actions by the MAS.
- MAS proposes to effect the Proposed Requirements after a transitional period of six months, that is, six months after the notice(s) issued under the relevant legislation is/are published.
3 “Representative” has the same meaning in Section 2(1) of the Securities and Futures Act, Chapter 289 of Singapore or Section 2(1) of the Financial Advisers Act, Chapter 110 of Singapore. In the context of FMCs, representatives generally refer to the person in the direct employment of, or acting for, or by arrangement with an FMC, who carries out for FMC any regulated activity, including fund management.
4These generally refer to the following persons, by whatever name described: (a) “chief executive officer,” “deputy chief executive officer,” and/or “resident manager”; (b) “chief financial officer” or “head of finance”; (c) “chief risk officer” or “head of risk”; (d) “chief operating officer” or “head of operations”; (e) “chief information officer,” “chief technology officer,” or “head of information technology”; (f) “chief information security officer” or “head of information security”; (g) “chief data officer”; (h) “head of business function,” which in the context of a FMC refers to the person principally responsible for the management and conduct of a function involving fund management or financial advisory services; (i) “head of human resources”; (j) “head of compliance”; (k) “head of financial crime prevention”; (l) “head of internal audit”; and (m) “chief regulatory officer.”
5“Specified risk” means 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 the MAS may specify.
Critical system in relation to an FMC means a system, the failure of which would cause significant disruption to the operations of the FMC or materially affect the FMC’s service to its customers.
7The intent of the Proposed Requirements is to facilitate FMCs’ access to necessary information to make informed hiring decisions. Hence, FMCs should use the information received as part of the reference checks to complement its due diligence on the prospective Prescribed Person, to determine his or her suitability for the position.
8FMCs are required to indicate whether they have requested the Prescribed Person’s assistance in the investigation and whether the individual has assisted or would be assisting in the investigation.
9A right to view a reference does not constitute a right to edit the content of the reference. FMCs should also ensure that there is no risk of tipping off the Prescribed Person, which may result in investigations being compromised when providing individuals with the right to view.