Banks have until 2 May 2023 to put in place the necessary internal controls, policies and procedures required for Phase 1 implementation of the MRC regime.
The HKMA (Hong Kong Monetary Authority) has issued a circular specifying a one year transition period to allow authorised institutions (AIs) to prepare for and implement Phase 1 of the new Mandatory Reference Checking (MRC) regime.
The MRC regime, first proposed in May 2020, aims to address operational, reputational, financial and other risks that so-called ‘rolling bad apples’ could present to financial institutions, as well as possible consumer harm that could result.
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.
In May 2021, the HKMA set out the underlying principles and key parameters for the MRC scheme, and invited an industry working group led by HKAB (Hong Kong Association of Banks) and the DTC Association to further flesh out the operational details.
New guidelines have now been issued by the industry associations, providing the operational details of the MRC regime. The regime will require AIs to conduct mandatory reference checks to fill specified positions, prior to the establishment of employment relationships.
For in-scope positions, AIs will be required to approach the former and current AI employers of a prospective employee to request conduct-related information covering the seven years prior to the application for such position.
Misconduct information to be reported includes:
- breach of legal or regulatory requirements
- incidents which cast doubt on an individual’s honesty and integrity
- misconduct reports filed with the HKMA
- internal or external disciplinary actions arising from conduct matters
- ongoing internal investigations
Reference providing AIs should respond within one month of the MRC request using a standard template.
Recruiting AIs retain discretion and remain responsible for their employment decisions, but they should document their reasons for employing an individual notwithstanding negative or inconclusive information received.
Phase 1 of the MRC regime will cover directors, chief executives, alternate chief executives, managers (defined under the Banking Ordinance), as well as executive officers and responsible officers for securities, insurance and MPF regulated activities.
In a circular, the HKMA says authorised institutions have until 2 May 2023 to put in place the necessary internal controls, policies and procedures required for Phase 1 implementation of the MRC regime.
The circular notes that a review of the MRC regime will be conducted in mid-2025, two years after implementation of Phase 1. Findings from this review will be used to refine the regime for Phase 2 implementation.
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.