With the upcoming introduction of the senior managers and certification regime (SM&CR), it's worth picking out a few of the employment law issues to think about. 

    Some of the issues raised under SM&CR are not new, but they do re-enforce some regulatory requirements you may have missed previously.

    Firstly, there's the issue of references under the SM&CR. This is important.

    In the world outside financial services (honestly, there is one) nobody provides a reference other than the bare details to confirm name, start and end date and job title. Maybe reason for leaving.

    The reason, other than convenience, is to avoid tribunals and litigation from disputed references. Opinion is avoided, even though that’s what everyone is after.

    Advice businesses are afforded no such luxury. The requirements for referencing regulated advisers forces a high level of mandatory disclosure and it doesn’t really end.

    SM&CR restates the perhaps little-known fact that regulated firms have a duty to update references if anything material comes to light after the original one was sent.

    Any serious misconduct discovered at a later date should be referred to the new employer (as well as the FCA, potentially).  

    Compromise agreements

    This presents a problem with traditional employment law practice, as SM&CR also states that regulated businesses should avoid signing agreements which limit their ability to provide honest information in a reference both now and in the future.

    These agreements are typically known as compromise agreements (and more recently as settlement agreements).

    They are beloved by HR people and lawyers who want to tidy up any loose ends when an employee exits the business under a cloud.

    Compromise agreements can work for both sides as they allow each party, who may well have fallen out irreparably, to draw a line under events and move on.

    The rules under SM&CR don’t mean these agreements can’t be used at all, but they will need careful consideration where an adviser is involved and there is any implication of malpractice.

    Solicitors who aren’t experienced in navigating the nuances of FCA regulation might not be aware of this and draft an agreement which breaches the rules.

    Advisers who are sacked for misconduct face permanent disqualification from financial advice.

    It’s inevitable that there could be some form of litigation, threatened or otherwise, for terminating on the grounds of gross misconduct. 

    The statutory compensation cap for unlawful dismissal is the lower of £86,444 or one year’s salary, plus a basic award of up to £15,240.

    A claim must be brought within three months of dismissal, so the risk is relatively short-lived.

    However, a greater financial risk surrounds a claim for a negligent, discriminatory or malicious reference which results in an adviser being unable to gain future employment.

    If an ex-employee (or self-employed adviser) can prove that your reference was inaccurate or misleading, and this has caused a loss of earnings, the costs could be far bigger than unlawful dismissal.

    This is a claim that could be brought well after termination, not within three months. The ongoing costs of litigation alone could be high, even if you win, and it’s worth checking if you are insured against them.

    Managing this specific risk is where compromise agreements come in very useful for FCA-regulated firms.

    It's why the FCA could consider what additional protection it could give to employers supplying references in return for the additional risk they are exposing themselves to.

    Without this protection, there is too much risk for employers when calling out bad practice and sharing honest information about bad advisers, both with the FCA and each other.

    This is not what the SM&CR is trying to achieve.

    You can find a host of useful resources on getting ready for the SM&CR here, where you can also download our SM&CR white paper.

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