Beware of the rolling bad apples

Bank Negara has proposed rules to tighten the financial industry’s employee screening

FINANCIAL regulators are talking about apples quite a bit these days. Actually, it’s “rolling bad apples” that they refer to and often in a cautionary tone, conjuring up an image of fruits bobbing around menacingly at our feet.

In this context, rolling bad apples are employees who have been sacked for misconduct or who have left when suspected of misconduct, but then find jobs elsewhere in the same industry.

The term is derived from the idea of bad apples – yes, the type that can each spoil the whole bunch – rolling from one barrel to another and tainting every place they go.

That concept’s relevance to Malaysia has recently gone up a few notches because Bank Negara has published an exposure draft on how financial institutions should screen potential recruits.

The paper’s proposals are meant to promote an ethical workforce within the financial sector. The central elements in the draft are mandatory sharing of employment references between financial institutions, and employee declarations of past criminal offences.

“Financial institutions are collectively responsible to uphold the integrity of the industry and it is in each institution’s interest to conduct a thorough due diligence on the individuals it seeks to employ,” says the central bank in the introduction.

“The recruitment process presents a critical opportunity for financial institutions to screen appropriate candidates and mitigate the risk of ‘rolling bad apples’ within the industry.”

The paper seeks to impose three obligations on financial institutions regarding employment references.

Before hiring somebody, a financial institution must obtain references from all his employers over the previous seven years. If a financial institution gets a request from another financial institution for an ex-employee’s reference, that reference must be provided within 15 working days.

And if a financial institution has given a reference for an ex-employee, it must update the reference when the financial institution has new information that would have caused the reference to be drafted differently. An example of such information is the conclusion of internal investigations into the ex-employee’s alleged misconduct.

Before a person is employed by a financial institution, he must make a statutory declaration giving details of any criminal conviction relating to companies, financial services, capital markets, money laundering or terrorism financing, and offences involving dishonesty or fraud.

The declaration must also cover his past employers in the past seven years.

In addition, the proposed paper addresses the financial institutions’ operational matters such as their internal disciplinary process and record-keeping, and the preparation of references.

These proposals shouldn’t be a surprise to our financial sector.

In a speech at a business ethics conference in April, Bank Negara deputy governor Abdul Rasheed Ghaffour spoke about the ethical challenge in building a culture of professionalism and integrity in the sector. He mentioned apples nine times.

He criticised how “bad apples” are allowed to leave organisations without having to face investigations and disciplinary action.

“This leaves them with a clean record to go on and stir wrongdoing in another organisation, and the next, and so on. This practice should stop. We are collectively responsible for upholding the integrity of our entire industry, not just our respective institutions,” he pointed out.

“What is important is transparency, to allow the job market to make informed decisions. In this regard, Bank Negara is currently pursuing an initiative that will mandate the sharing of employment references with future employers.

A key objective for this is to mitigate the problem of ‘rolling bad apples’ within the Malaysian financial industry.”

Financial regulators elsewhere have been looking at shutting out the rolling bad apples for a few years already.

Britain’s Chancellor of the Exchequer and the Bank of England governor launched the Fair and Effective Markets Review in June 2014. This was after serious misconduct had been exposed in the wholesale fixed income, currency and commodities markets.

The review culminated in a final report published in June 2015 that labels individuals with poor conduct records as – you guessed it – rolling bad apples.

The authorities recognised that it was important for firms to have access to relevant information about these people’s prior conduct record from past employers. Otherwise, these rolling bad apples would be able to move between firms undetected.

Rules were proposed to require firms to obtain, and to provide, so-called ‘regulatory references’ to one another when seeking to employ an individual in a role that requires certification or pre-approval.

These rules have since been adopted. In a March 2017 speech, Bank of England governor Mark Carney said: “To address the ‘rolling bad apples’ problem, mechanisms are now in place in the UK to ensure that when individuals move on, their history will be known to those who consider hiring them. The Financial Stability Board is now considering whether to adopt such an approach more broadly.”

In October 2014, Bill Dudley, the president and CEO of the Federal Reserve Bank of New York, floated the notion of creating a central registry that “tracks the hiring and firing of traders and other financial professionals across the industry”.

He later described it as “a database of banker misconduct to combat the problem of ‘rolling bad apples’”. Paired with this are a duty to report misconduct and a duty to check the database before an employee is hired.

This idea is still being debated in the US because of the legal implications and the worry that there would be abuse of the database.

These are not an issue here because Bank Negara is proposing a different approach. It won’t be a cure-all but it will help weed out those people whose behaviour can threaten the integrity of the financial industry and weaken public confidence in the financial sector.

Executive editor Errol Oh hasn’t changed employers for more than 15 years. He may or may not be a bad apple, but at least he doesn’t roll much.

Source : The Sun