Mandatory Reference Checking Scheme

Our Ref: B1/15C

B9/202C

5 May 2022

The Chief Executive

All Authorized Institutions

Dear Sir / Madam,

Mandatory Reference Checking Scheme

I am writing to draw your attention to the Guidelines on the Mandatory

Reference Checking (“MRC”) Scheme issued by the Hong Kong Association

of Banks (“HKAB”) and the DTC Association today. The Hong Kong

Monetary Authority (“HKMA”) endorses the MRC Scheme.

Background

The MRC Scheme seeks to address the “rolling bad apples” phenomenon in

the banking sector in Hong Kong, i.e. situations where individuals who engage

in misconduct during their employment in one institution are able to obtain

subsequent employment in another institution without disclosing their

misconduct to the new employer. Such individuals who are not held

accountable at one institution and surface at another can potentially have a

higher likelihood of repeating their misconduct. This may give rise to

operational, reputational, financial and other risks at the new employer

institution. More broadly, “rolling bad apples” may also inflict harm on bank

customers and undermine public confidence in the banking sector.

The MRC Scheme

Against this background, the HKMA consulted the banking industry in mid-

2020 on a proposed framework to facilitate Authorized Institutions (“AIs”) to

bilaterally obtain reference information during their recruitment process for

certain positions, such that misconduct information in an individual’s previous

employments can be provided to AIs to inform their employment decisions.

Taking into account the responses received, the Consultation Conclusions

issued by the HKMA in May 2021 set out the underlying principles and key

parameters for the MRC Scheme, and invited an industry working group led

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by HKAB to further flesh out the operational details, in consultation with the

HKMA.

The Guidelines on the MRC Scheme issued by the industry associations today

provide the operational details of the MRC Scheme. In gist, AIs recruiting for

certain specified positions that fall within the scope of the MRC Scheme

(“recruiting AIs”) will be required to approach the former and current AI

employer(s) of a prospective employee (“reference providing AIs”) to request

conduct-related information covering the seven years prior to the application

for such position. Misconduct information to be reported includes (i) breach

of legal or regulatory requirements; (ii) incidents which cast doubt on an

individual’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. Reference providing AIs

should respond within one month of the MRC request using a standard

template.

It is worth emphasising that one of the underlying principles of the MRC

Scheme is that misconduct matters that are deemed serious or material in

nature should be reported by reference providing AIs, irrespective of whether

or not the employment of the individual concerned was terminated for the

misconduct. Recruiting AIs, while retaining the discretion and remaining

responsible for their employment decisions, should document their reasons for

employing an individual notwithstanding negative or inconclusive information

received.

Implementation

The MRC Scheme is applicable to all AIs and will be implemented by phases.

In Phase 1, the positions to be covered include directors, chief executives,

alternate chief executives and managers as defined under the Banking

Ordinance, as well as executive officers and responsible officers for securities,

insurance and Mandatory Provident Fund (“MPF”) regulated activities. A

review of the Scheme will be conducted two years after the implementation of

Phase 1 (i.e. in mid-2025). The findings of the review will help refine the

Scheme in its Phase 2, which is expected to be expanded to also cover

individuals licensed or registered to carry out regulated activities. Please refer

to the Annex for details on the positions to be covered in Phase 1 and Phase 2.

To allow sufficient time for AIs to put in place necessary internal controls,

policies and procedures, there is a 12-month preparatory period for the

implementation of the MRC Scheme, i.e. AIs are expected to implement

Phase 1 of the MRC Scheme by 2 May 2023.

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HKMA’s Supervisory Approach

The MRC Scheme is an important component of the HKMA’s effort for the

further enhancement of bank culture in Hong Kong. While the MRC Scheme

is not introduced as a supervisory requirement, the HKMA attaches great

importance to the effective implementation of the Scheme. In particular, the

HKMA considers that repeated failures of an AI to adhere to the requirements

of the MRC Scheme may indicate potential weaknesses with its governance

arrangements or internal controls and procedures. The HKMA will monitor

AIs’ observance of the MRC Scheme during its ongoing supervisory efforts

and may initiate follow-up actions with the AIs concerned as appropriate.

If there are any questions about this circular, please contact Mr Osbert Lam at

2878-8795 or Ms Amy Wong at 2878-8830. If there are any questions about

the Guidelines of the MRC Scheme, please contact your industry association.

Yours faithfully,

Arthur Yuen

Deputy Chief Executive

Encl.

c.c. The Chairperson, The Hong Kong Association of Banks

The Chairperson, The DTC Association

Annex

Coverage of personnel of the MRC Scheme

Phase 1

• Directors approved under §71 of the Banking Ordinance (“BO”)

• Chief executives and alternate chief executives approved under §71 of

the BO

• Managers notified to the HKMA under §72B of the BO

• Executive officers approved under §71C of the BO

• Responsible officers (“ROs”) approved by the Insurance Authority

(“IA”) under §64ZE of the Insurance Ordinance (“IO”)

• ROs approved by the Mandatory Provident Fund Schemes Authority

(“MPFA”) under §34W of the Mandatory Provident Fund Schemes

Ordinance (“MPFSO”)

Phase 2

• All personnel already covered in Phase 1

• Staff licensed to carry out securities related regulated activities under

the Securities and Futures Ordinance (i.e. Relevant Individuals, or

“ReIs”)

• Staff licensed to carry out insurance related regulated activities under

the IO (i.e. Technical Representatives licensed by the IA under §64Y or

§64ZC of the IO, or “TRs”)

• Staff registered to carry out regulated activities under the MPFSO (i.e.

subsidiary intermediaries registered with the MPFA under §34U(4) of

the MPFSO)