Phase 1 of the Mandatory Reference Checking Scheme: What should employers look out for?

On 5 May 2022, the Hong Kong Monetary Authority ("HKMA") announced the implementation of the Mandatory Reference Checking Scheme (the "MRC Scheme") (including the guidelines) issued by the Hong Kong Association of Banks and the DTC Association (the "Guidelines").

The MRC Scheme seeks to address the “rolling bad apples” phenomenon in the banking sector in Hong Kong, that is, to prevent individuals involved in misconduct from moving from one authorized institution ("AI") to another, by enhancing the disclosure of the employment history of prospective employees taking up regulated roles among AIs.

AIs have been given until 2 May 2023 to put in place the necessary internal controls, policies and procedures, for the implementation of Phase 1 of the MRC Scheme.

This article will focus on the obligations imposed on AIs in the capacity of recruiting potential candidates and providing employment references to other AIs.

Scope of the MRC Scheme

The MRC Scheme will be launched in two phases.

Phase 1 will require AIs to obtain references from current and former employers of prospective employees who fall within the following category:

• a director, chief executive, alternative chief executive approved under section 71 of the Banking Ordinance ("BO");
• a manager notified to the HKMA under section 72B of the BO;
• an executive officer approved under section 71C of the BO; or
• a responsible officer approved under section 64ZE of the Insurance Ordinance ("IO") or section 34W of the Mandatory Provident Fund Schemes Ordinance ("MPFSO").

Phase 2 will expand the scope of the MRC Scheme to cover prospective employees who are permitted to carry out regulated activities under the Securities and Futures Ordinance ("SFO"), the IO or the MPFSO.  Other roles may be further added to the Phase 2 scope depending on the feedback after the Phase 1 implementation.

The MRC Scheme also applies to individuals who are moving between the same AI group.  However, in instances of intra-group transfers, an AI seeking to recruit individuals for specified positions ("Recruiting AI") may use alternative ways to conduct reference checks instead, e.g., by relying on internal company records.

The MRC Scheme only applies to AI employees in Hong Kong and not those employed at a head office, subsidiary or branch outside of Hong Kong.  This means that an AI is not required to seek a reference when seeking to hire a staff outside of Hong Kong.

Obligations under the MRC Scheme

A Recruiting AI should obtain the written consent from the prospective employee to:

• (i)authorise the Recruiting AI to conduct employment reference checking with his/her former and current AI employers of the seven years prior to the job application, regardless of the duration of his/her employment at the prior AIs ("Reference Providing AIs");

   

• (ii)authorise the Reference Providing AIs to disclose relevant employment records and conduct-related information to the Recruiting AI; and

   

• (iii)exempt Reference Providing AIs from any contractual obligations that may limit their ability to disclose information regarding the prospective employee.

Misconduct information concerning a prospective employee that should be reported includes: (i) breach of legal or regulatory requirements; (ii) incidents which cast doubt on the prospective employee's honesty and integrity; (iii) misconduct reports filed with the HKMA; (iv) internal or external disciplinary actions arising from conduct matters; and (v) ongoing internal investigations.

If a prospective employee refuses to provide the above consent, the Recruiting AI should consider the reasons for the refusal and whether such refusal casts doubt on the individual's fitness and propriety.  Whilst the Recruiting AI may still proceed with employment without undergoing the MRC Scheme process, it should fully document its justification for the exemption.

Upon obtaining the necessary consent from the prospective employee, the Recruiting AI should then request the Reference Providing AIs for employment references, who in turn, should make the required disclosures within one month of receiving the request using a standard template.  The Recruiting AI can request further information within 15 working days of the receipt of the employment reference, which should be provided by the Reference Providing AI within another 15 working days.

If the reference checks come back with negative information, the prospective employee should be given the opportunity to be heard as a matter of procedural fairness and an opportunity to address such information in light of the data access and correction rights in relation to personal data provided under the Personal Data (Privacy) Ordinance.  When deciding whether or not to hire the prospective employee, the Recruiting AI should take into account all information received to make the employment decision, including the competence of the individual, relevant regulatory requirements and the likelihood of the individual committing misconduct again in the new working environment.

Remarks

AIs are encouraged to familiarize themselves with the requirements under the MRC Scheme and ensure there are sufficient policies and procedures in place when the scheme comes into effect. This includes:-

• revising existing employment contracts to include clauses to the effect that employment is subject to satisfactory reference check results pursuant to the MRC Scheme;
• preparing data consent forms to (i) obtain authorization for recruiting AIs to conduct employment reference checks and (ii) obtain authorization for the Reference Providing AIs to disclose relevant employment records to the Recruiting AI;
• preparing or revising data consent forms regarding intra-group data transfers; and
• putting in place safeguards in respect of legal privilege or confidentiality when responding to reference requests, especially in circumstances where there are internal investigations and/or disciplinary action against the particular individual.

It is important for AIs to identify any gaps within their existing systems and make the necessary changes needed to implement Phase 1 in May 2023 in accordance with the requirements of the Guidelines and to respond to reference requests received thereon.

Our team at RPC are widely recognized as leading employment lawyers in Hong Kong. We are one of the few specialist employment law practices in Hong Kong and we act for both employers and employees on contentious and non-contentious matters.

Please do not hesitate to contact our Partner and Head of the Employment Practice in Hong Kong, Andrea Randall (andrea.randall@rpc.com.hk / +852 2216 7208) for any queries regarding the issues raised in this article or any employment law related queries you may have.

All material contained in this article is provided for general information purposes only and should not be construed as legal, accounting, financial or tax advice, or as opinion to any person or specific case. RPC accepts no responsibility for any loss or damage arising directly or indirectly from action taken, or not taken, which may arise from reliance on information contained in this article. You are urged to seek legal advice concerning your own situation and any specific legal question that you may have.