HKMA Proposes Mandatory Reference Checks to Stop Rolling Bad Apples

Under the scheme, prospective employees would be required to disclose employment records to recruiting AIs before a new employment relationship is established.

The HKMA (Hong Kong Monetary Authority) has issued a new consultation paper on the implementation of a Mandatory Reference Checking (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.

“Individuals who are not held accountable for their misconduct at one firm and surface at another firm could have a higher likelihood of repeating their misconduct,” the HKMA says

This may give rise to operational, reputational, financial and other risks to the new employer, and can end up inflicting harm on bank consumers and undermining public confidence in the banking sector – thereby creating potential systemic risks.

The consultation paper proposes a framework that would require authorised institutions (AIs) to conduct mandatory reference checks to fill specified positions.

The HKMA seeks to establish a common protocol for reference checking to help enhance the disclosure of a prospective employee’s misconduct history, prior to the establishment of an employment relationship by a recruiting AI.

Under the MRC scheme, prospective employees would be required to disclose 10 years of their employment records. Accordingly, all AIs should maintain employment records of their employees for at least 10 years from the date of their departure.

It is proposed that written consent should be obtained from prospective employees to authorise the recruiting AI to conduct reference checking, and separately to authorise the current and former AIs to disclose employment records.

Where there is any negative information from the reference providing AIs, the recruiting AI should provide the prospective employee with an opportunity to be heard, and still be allowed to offer employment at its discretion, in spite of such negative information.

The proposed MRC scheme will initially be confined to the local banking sector. Phase 1 of the scheme will cover directors and bank employees in senior management positions.

After one year, industry feedback and experience will be gathered to provide the basis for Phase 2 implementation, which will extend coverage to bank employees heading key supporting functions, and those who have client-facing or sales roles.

The consultation, available here, is open until 7 August.

Specifically, the HKMA has written to the HKAB (Hong Kong Association of Banks), the DTC Association, the PWMA (Private Wealth Management Association) and ASIFMA seeking their comments on the proposals.

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