The power of risk: what highly-regulated industries should know about hiring

Industries across the board might want to pull from the legal and financial services sectors’ playbook, prioritising risk management and compliance with new hires

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The House of Commons’ latest report on the state of post-pandemic economic growth could arguably be summed up in a single line: “The UK has a tight labour market.” 

The number of job vacancies, although not quite reaching the stratospheric levels recorded in 2022, remains persistently high. Meanwhile, Britain’s national unemployment rate is “close to a record low.” Attracting and retaining top talent has rarely been so precarious - nor so vital.

For strictly regulated sectors like legal and financial services, hiring has always been a high-stakes operation concentrated on airtight compliance, trust, and sector-specific knowledge. Luke Shipley, co-founder and CEO of background and reference-checking software firm Zinc, says that pre-employment screenings have, for that very reason, long been standard practice in these sectors.

The challenge, Shipley explains, is that many firms still struggle to balance compliance and risk management with candidates’ needs. On one flank, organisations are met with the threat of fines or disciplinary action from regulatory bodies. A misstep (or an overstep, even) can inflict lasting damage on a company’s reputation. On the other is the risk of strong candidates pulling out of the process due to badly-managed background checks that do little more than leave a sour taste.

The pitfalls of non-compliance

“Regulators have taken very public action in the past against financial services companies for not doing the checks that they are expecting them to do. The fallout that comes with finding people in the organisation with falsified backgrounds or criminal records can be huge,” says Shipley. 

“And yet, the bar is still quite low in terms of financial services companies doing what their regulators have stipulated,” he continues, adding that only 31% of firms conduct qualification and professional memberships checks. 

All this comes in spite of the Financial Conduct Authority’s (FCA) Fit and Proper regulations requiring qualification and training checks. Indeed, many of the major fines handed out to financial services firms have cited diligence and background checking as a sore spot, Shipley notes.

In 2015, Deutsche Bank AG was fined £227m by the FCA for LIBOR and EURIBOR-related misconduct. The amount was linked to the bank’s failure to put systems in place to adequately vet traders, allowing individuals without the requisite integrity or expertise to engage in benchmark rate-setting activities. In similar cases, employee training, hiring practices, and background checks have all been cited as factors in FCA assessments.

Automating these processes is a game changer, says Shipley, stressing the need for checks to be carried out with “consistency and pinpoint accuracy” to reduce the risk of compliance violations and associated penalties. A surge in the number of failed background checks may be on the horizon as advanced capabilities allow businesses to detect red flags such as unexplained gaps in employment or negative or unreliable references.

Playing by the rules

Naturally, HR teams in the financial services and legal industries must often jump through more hoops before onboarding talent. 

A retail company, for example, might look at some employee references and carry out a Right To Work check. By the same token, a financial services organisation could be expected to do five or more different types of background checks, including qualification checks and professional membership checks. 

“There’s still a lot of confusion among HR functions in terms of how to interpret the regulator’s requirements,” says Shipley. “Interestingly, we find that with 16% of financial services candidates that are background checked by Zinc, something is flagged up on the report for the client to review.”

And these aren’t always new regulations. Shipley points out that the Senior Managers and Certification Regime (SMCR) regulation - which looks at employees’ qualifications, competencies and personal characteristics - has been around for 10 years. With so many rules to requirements to keep up with, human error is a risk. But automation has emerged as a valuable tool for HR teams to minimise mistakes and track key changes. 

Mitigating the flight risk

Long turnaround times for pre-employment screenings can be something of a thorn in the side for organisations trying to exercise due diligence. The more rigorous processes are, the more potential they often have to cause frustration among hopeful hires. 

Take regulatory reference checks. They’re mandated for all senior managers and certified function roles in finance and legal by the FCA and PRA (Prudential Regulation Authority) and can take a sizable chunk of time to peel through. But they needn’t. 

“Many other checking firms state a 28-day turnaround, which means the wait for candidates to join companies could be two months minimum. Some will decide to leave the process, but that time scale also prevents financial services firms from being able to bring new employees in quickly,” says Shipley. “At Zinc, it takes six days, which significantly reduces the risk of candidates dropping out of the hiring process.” 

This month, Zinc announced the launch of the first employment reference solution integrated with HMRC, which is now being used to check several thousand candidates. The initiative allows HR and talent teams to instantly view the past five years of an applicant’s employment history, certified and rubber-stamped by the HMRC, in seconds and is set to have significant implications for firms looking to drive efficiencies and boost competitiveness.

Positive candidate experiences will remain key amid the current market squeeze

The war for talent may have cooled off slightly, but HR leaders mustn’t lower their guard. “The expectations that people have of the software being used today is much higher than it was a few years ago,” says Shipley. “Automation is the quickest route to transparency and time-saving at the screening stage.” He points out that positive candidate experiences will remain key amid the current market squeeze.

Lessons to be learned

One irksome truth HR chiefs might collectively agree on is that talent shortages do not discriminate. Cash is tight everywhere and regardless of the industry or role, getting hiring right needs to happen first time. But are all sectors doing enough to crack down on best practices and background checks?

“If you look outside the financial services industry, the number of organisations being fined for not completing Right to Work checks is on the rise, as is the size of the fine, which is now up to £20,000 per employee,” says Shipley. He concedes that not every company will face the same level of scrutiny from the powers that be, but those that build a complete picture of their recruits will likely find talent that stands the test of time while appeasing regulators.

So, what’s on the agenda for 2024? Any tech that can minimise the lift and maximise the impact of time-consuming manual jobs seems to be worth its salt. CHROs that prioritise automation around employee background checks will free up teams to deliver against strategic HR tasks, including talent development and engagement, which are increasingly as the pace of modern business accelerates. 

It falls to HR leaders to be on top of these critical issues,” says Shipley. “The more that we can do to educate them on how they can help themselves and their companies, the more confidence they will have in their talent acquisition strategies.” And confidence is just what HR needs as the market wavers. 

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