The HKMA has adjusted the scope of the regime, shortened the record retention requirement, and lengthened the time allowed to respond to an MRC request.
The HKMA (Hong Kong Monetary Authority) has issued its consultation conclusions on last year’s paper proposing the introduction of a Mandatory Reference Checking Scheme (MRC Scheme) to address so-called ‘rolling bad apples’ in the banking sector.
Rolling bad apples refer to individuals who engage in misconduct during their employment at a financial institution, but are nonetheless able to obtain subsequent employment elsewhere without disclosing their earlier misconduct to the new employer.
The consultation, issued in May 2020, was aimed at addressing operational, reputational, financial and other risks that rolling bad apples could present to financial institutions, as well as possible consumer harm that could result.
The HKMA proposed a common protocol for authorised institutions to conduct mandatory reference checks to fill specified positions, prior to the establishment of employment relationships.
Based on respondent feedback, the HKMA has adjusted the scope of the individuals covered under the regime, adding responsible officers under the MPF Schemes Ordinance, removing some overlap, and removing individuals who head key supporting functions and client-facing staff who provide general banking services.
As such, Phase 1 of the scheme will cover directors, chief executives, alternate chief executives, managers (under section 72B of the Banking Ordinance), executive officers, and responsible officers under the Insurance and MPF Schemes ordinances.
Phase 2 will bring into scope all staff licensed or registered to carry out regulated activities under Securities and Futures, Insurance and MPF Schemes ordinances.
Under the proposal, prospective employees would have been required to disclose 10 years of their employment records, and financial institutions to maintain employment records for at least 10 years after an employee’s departure.
This has been adjusted to 7 years, which is the conventional practice for bank employment record retention, and considered more fair for employees in rehabilitation.
Additional flexibility will also be considered in relation to the disclosure of open investigations, to avoid exposing banks to litigation risks that could arise as a result of confidentiality and secrecy requirements.
“On the one hand, there are constraints and potential legal implications associated with disclosure of ongoing and incomplete investigations by the reference providing AIs to the recruiting AIs,” the HKMA said.
“On the other hand, if all ongoing and incomplete investigations are excluded, it may give rise to a potential loophole for the ‘bad apples’ to resign from the current job once an investigation of their misconduct is started or is about to conclude with likely disciplinary actions.”
The timeframe for banks to respond to MRC requests will be extended to one month, from the 10 days initially proposed.
The HKMA said that an industry working group will be set up to work out the operational details of the MRC Scheme in accordance with the principles set out in the consultation conclusions.
This includes deliberations on what constitutes reportable information and practical guidance to provide examples, as well as the development of a standard written consent template to ensure a consistent approach is adopted across the industry.
The HKMA will retain a proposal that requires recruiting banks to provide prospective employees with an opportunity to be heard, in the event that any negative information is revealed in reference checks.
Except for the appointment to some senior positions that require regulatory approvals, banks will have discretion on their employment decisions, including in relation to individuals with prior misconduct or negative information revealed in reference checks.
The working group will also conduct a feasibility study on the potential for a central register to be developed for the MRC Scheme.
The working group is expected to deliver the operational details of the MRC Scheme within six months, i.e. within November 2021.
An implementation timeline is subject to further deliberation by the working group. The HKMA will conduct a review of the MRC Scheme two years after the commencement for Phase 1.
The consultation conclusions are available here.