For December 1 is N2 day, when the Financial Services Authority (FSA) assumes its full regulatory powers in the UK. One of the changes on the way is that companies will be expected to provide more informative references for ex-employees than they do at the moment.
This could make it harder for staff with troubled employment records to find a job.
Hilary Jackson, group development manager of the City Personnel Group, an organisation of human resources professionals, says: 'The FSA is asking us to make references for future employers far more detailed. Until now, it has been standard practice to confirm only that an individual has been employed. References have contained little beyond job titles and dates of employment.'
Some human resources executives believe that this has created a culture in which bad employees are simply passed from firm to firm. One recruiter says: 'Traditionally, investment banks haven't taken action against poor performance. The tendency has just been to let bad people go and to hope that they perform badly elsewhere.'
Under N2, however, incompetence in regulated functions (which include everything from client-facing positions in corporate finance to senior operational positions in areas such as risk management), must be clearly documented, and brought to the attention of future employers.
The move is designed to improve quality. 'More detailed references are perfectly in line with our emphasis on ensuring that all individuals are fit and competent to perform in their position,' says a spokesman for the FSA.
But firms are wary of making explicit their reservations about staff. Jackson says: 'There is a danger that employees could sue. Even where no conclusion has been reached, internal investigatory procedures may now have to be mentioned in references. If this prevents a new employer from taking that person on, there could be a problem.'
While N2 appears to require banks to keep detailed and potentially defamatory records on employees, the Data Protection Act, which came into force last year, gives employees the right to see those records.
David Dalgarno, a partner at the law firm McDermott Will and Emery, says: 'The combination of the Data Protection Act and N2 creates a catch-22 situation. On one hand, the FSA's rule book requires employers to bear the responsibility for ensuring that records and references are comprehensive as to competence and capability and also that references requested about employees and former employees mention any relevant outstanding or upheld complaints against that person. On the other hand, employers can be required to show those records to the employee both during and after employment.'
Dalgarno says that employers are at risk of facing litigation from both sides. Future employers may claim that they were not informed about past errors. Employees may claim that their prospects have been unfairly damaged by inaccurate or unfair references.
To avoid this risk, Dalgarno advises line managers and human resources staff to prepare for the possible disclosure of negative material from the outset. 'Procedures which could result in a formal record being put on the individual's personnel file must be dealt with properly from the start,' he says.
References resulting from such a record must be truthful and balanced. 'If an inconclusive investigation has been mounted against an employee, the reference may have to mention this.
'But if the individual remained in employment after the investigation, and there were no additional causes for concern, the reference should state those facts as well.' But banks are unlikely to take risks when it comes to employing people whose references hint at poor conduct.
Sandy Campbell, head of HR in London at UBS Warburg, says: 'It is now part of our responsibility to be able to demonstrate to the regulator that a person is fit and competent.'
'We therefore need to be doubly careful that we vet the career and education history of that person and hold proper records showing that checks have been made, the individual's skills match the job and that ongoing training is provided to maintain fitness,' he says.
Employees must also be prepared to give a full account of their recent career.
'The FSA is asking that each person provide a 10-year work history with no gaps,' says Mike Whittington, managing director of Financial and Personnel Research, which offers pre-employment screening for banking employees. People who have travelled abroad might even need to produce visas or passport stamps to prove it.
Fred Hohler, chairman of Peoplerisk, which checks information in CVs, says the arrival of N2 is increasing banks' awareness that they cannot afford to take employees' assertions on trust.
Firms must also beware of hiring people on the basis of social connections or subjective judgment. One recruiter says: 'Line managers have employed people simply because they had experience at top houses, knowing they could try them out and let them go if they were no good.
'In future, simply saying, 'He's a good guy and I want him', will no longer be enough.'