PIA: Guidance on recruitment

United Kingdom

In Regulatory Update 50, PIA has issued extensive guidance on recruitment procedures and documentation processes which should be required reading for those involved in compliance or human resources at regulated firms. It addresses some of the more common failings which PIA's monitoring teams find when reviewing recruitment procedures, and PIA requires firms to review their current procedures in the light of this guidance.

Individuals

A firm is required to:


  • obtain the information specified in Table 2 of Chapter 2 of PIA's rules
  • obtain references
  • analyse the information and references
  • if necessary, individually register the individual.

Chapter 2 information

The easiest way of obtaining the Table 2 information is to send the applicant a form requesting the required details. The difficult part comes in checking that the form has been properly completed. For example, firms should check:


  • any omissions or inconsistencies in the individual's personal information;
  • both the month and year for each period of employment going back 10 years in order that it can be cross-checked against the information provided on references;
  • any gaps of employment of more than 2 months so that they can be explored and confirmation sought (for example, from the DSS) where necessary. Periods spent travelling abroad should be verified by obtaining the confirmation of a personal referee;
  • qualifications, by obtaining sight of the original certificate and keeping a photocopy on the firm's file; and
  • further details should be sought if any questions on Form 2 relating to character is answered in the positive.

References

A firm must, as a minimum, obtain references from:


  • the firm which last employed the individual as a financial adviser or representative; and if different
  • the individual's last employer.

It is not a requirement to obtain a reference from a firm which has been wound up, but steps should be taken to ascertain the circumstances in which the firm ceased trading by contacting its accountants to see if any adverse information on the dissolution of the firm reflected on the individual concerned.

If a reference was not for a suitable period (for example, the last employment had been for only 6 months), a reference should be obtained in relation to that employment but, also, a firm should consider whether such a reference would provide it with reasonable grounds on which to base its decision as to fitness and properness. As a guideline, a firm should obtain references which cover the previous 5 years of an individual's employment history.

It is important that a request for a reference is made direct to the referee. References addressed "To Whom It May Concern" or which are routed via the individual, are not acceptable. Oral references are not sufficient unless backed up in writing.

Analysing the information

It is essential that before making a decision on whether to appoint an individual or not, a firm critically reviews the Table 2 information and the references, and documents the reasons why it is satisfied that the individual is:


  • of good character;
  • of the requisite aptitude;
  • suitable; and
  • a person who complies with the relevant requirements of the firm's training and competence scheme.

The firm must in each case be objectively satisfied on these points; it may not give an individual the "benefit of the doubt".

Individual registration

When analysing the information firms should bear in mind that an individual may be required to be individually registered, and this will mean that that individual will have a direct contractual relationship with PIA. When registering an individual, each firm is required to sign a warranty that it is satisfied on reasonable grounds that the individual is fit and proper to perform the functions he or she will be undertaking. It is important that these reasonable grounds, and the thought process behind them, are properly documented.

Recruitment of appointed representative firms

Before appointing a firm as an Appointed Representative ("AR"), the appointing firm must first:


  • obtain the information specified in Table 2 of Chapter 2 of the Rules;
  • obtain references;
  • obtain the information specified in Table 3 of Chapter 2 of the Rules; and
  • analyse this information.

Table 2 references

If any principal of the firm is to be appointed as a financial adviser or representative, the Table 2 information must be obtained as if that person were an individual financial advisor or representative.

References

References must also be obtained on principals to establish their fitness and properness, and these should cover the previous 5 years in order that a firm can show on reasonable grounds that it was satisfied as to the fitness and properness of the principals.

Table 3 information

A firm must obtain the Table 3 information in relation to the AR's business. Firms should also consider requesting references from the firm's professional advisers (for example, solicitors or accountants).

Analysing the information

Again, it is essential that the information provided above is fully analysed, and the reasons why the firm was subsequently satisfied as to the fitness and properness of the AR are properly documented.

Providing references

Firms are required to provide references within 15 days of them being requested from another regulated firm which make full and frank disclosure of all matters which the firm has reasonable grounds for believing to be relevant and true.

Contents

The Rules do not prescribe specific areas which a reference should cover, but PIA considers that at a minimum that it should include information relating to the following:


  • period and nature of service (dates appointed, position held, reason for leaving);

  • employment history (of all regulated firms where the individual has worked);

  • training (the individual's classification as new, experienced or competent, the date classified, CPD and other training undergone, qualifications held, and any restrictions on the kinds of investment business which the individual was permitted to carry out);

  • cancellation levels (the proportion of policies cancelled under the Cancellation Rules, and whether that level was acceptable);

  • persistency (including the proportion of policies in force at 12 and 24 month anniversaries and whether this was acceptable);

  • standards of advice (including details of any sustained pattern of failing to give investors suitable advice);

  • complaints (received, upheld, investigations undertaken and compensation paid, including ex-gratia payments for commercial reasons although this factor can be noted);

  • discipline (including details of any formal reprimand or discipline or charge or conviction for fraud, dishonesty or violence); and

  • debts (including monies owed to the firm and any knowledge which the firm has of other financial problems).

The full and frank requirement

All information which a firm has reasonable grounds for believing to be relevant and true must be included on the reference, although it can contain an invitation to discuss the reference in person to give a more rounded picture of the individual. However, firms must not disclose orally information which they are not prepared to disclose in writing. It is also unacceptable for firms to enter into a "reference deal" with an individual where, for example, a favourable reference is promised if the individual will agree to resign.

When providing a "full and frank" reference, firms should remember that a number of persons within their organisation may have information which is both relevant and true, and should ensure that all such persons have the opportunity to input into the reference. For example, if a representative's supervisor had only been in that position for a number of months, it will be essential to contact the previous supervisor to receive a full picture of an individual's working habits and suitability. It is not acceptable simply to conclude that because a firm allowed an individual to continue to transact regulated business that they must therefore have continued to be suitable for employment.

Conclusion

When inspecting firms, failures in recruitment procedures are a common problem which PIA regularly picks up on. This is because, for example, accepting a "To Whom It May Concern" reference is a tangible failure which is easy to spot. Such failures are also fairly easy to avoid, and recruitment procedures should be looked at by firms as a basic compliance requirement which it would be an own-goal to get wrong.