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Apologies for the delayed response, I'm glad you figured it out though.
Just to confirm there are no limitations on where you create a list object and where you can then reference them. You could create a list in Incident Management and create relationships to it from objects in Problem Management. But I wouldn't recommend that particular scenario - if a list object is going to be generic enough for use in lots of places then the best module to create it in is System. This is simply to keep things well arranged.
Andrew Ward Doh!!! Looks like I was chasing my tail unnecessarily. Unfortunately I had already added the original reference list on my form but unfortunately had managed to lose it underneath another control. This was preventing me from dragging the reference control onto my form and so I thought I had got something wrong with the business objects. If only I had taken notice of the tick mark on the attribute icon earlier I would not have become so frustrated. So to answer my question... It is NOT necessary to place a reference list in the System folder.