The new Training and Competence regime
By Peter Rooke, Associate, Retail Policy and Themes Division FSA
We are now three months into the new Training and Competence (T&C) regime, which came into force at the same time as the Markets in Financial Instruments Directive (MiFID) on 1 November 2007. Firms have doubtless been considering what they need to do differently under the new regime, compared to what they did under the previous regime. Has your firm changed its T&C arrangements significantly? Should it have made changes? How different is the new T&C regime to the old one? This article deals with these questions, along with a few other issues that have been raised. But let’s first remind ourselves what the new regime looks like.
What does the new T&C regime look like?
The new T&C regime introduced a new, high-level competence requirement which applies to all UK authorised firms (the ‘competent employees rule’). It also replaced the previous T&C sourcebook with a much simpler, shorter and more principles-based sourcebook which applies to retail business only.
Although we made changes to the T&C requirements when we introduced the new regime, we did not change the high-level regulatory framework within which the T&C regime fits. So we have not lowered the competence standards expected of firms. Nor have we raised standards. What we have done, though, is provide firms with greater clarity as to what is expected of them by focusing on the required outcomes. So we have moved from prescriptive rules to principles-based requirements wherever possible and have given senior management more flexibility to decide how to deliver these outcomes.
The competent employees rule is based on the high-level competence requirement in MiFID – this applies not just to ‘common platform firms’, but to all UK authorised firms. (‘Common platform firms’ is the term we have given to authorised firms subject to either MiFID or the Capital Requirements Directive or both.)
The competent employees rule replaced the Commitments in the previous T&C sourcebook, as it covers the same ground. The rule requires firms to employ personnel with the skills, knowledge and expertise necessary to discharge the responsibilities of their role. So this requires firms to ensure not just that their staff are competent for their job, but remain competent as well.
The new regime and wholesale firms
On the wholesale side, we have disapplied the detailed requirements. So wholesale firms are now subject only to the competent employees rule. However, we are still applying the same T&C standards to wholesale firms as we did under the previous T&C regime. So firms may wish to continue to apply the same or similar competence assessment procedures to their staff. But the new regime gives them the flexibility to decide how to assess competence and who should do it.
As wholesale firms are now subject only to the competent employees rule, they are not subject to compulsory exam requirements. However, there is a piece of guidance in SYSC for firms that voluntarily use exams which appear on the Financial Services Skills Council (FSSC) list of ‘recommended examinations’. This indicates that we will take these exam arrangements into account in assessing compliance with the knowledge component of the competent employees rule. In other words, we will give due recognition to wholesale firms who choose to require their staff to pass exams approved by the FSSC. But firms now have the flexibility to decide if they want passing an exam to form part of the process of achieving competence, including, for example, whether an individual from overseas should have to pass a regulatory exam.
The T&C sourcebook
The T&C sourcebook now applies only to specified retail activities – essentially the same retail activities as were subject to the detailed T&C requirements under the previous regime. The standards remain the same. So, retail firms may wish to continue to apply the same or similar competence assessment procedures to staff who are carrying out activities within its scope.
The T&C sourcebook explains in guidance that competence means having the skills, knowledge and expertise needed to discharge the responsibilities of the employee’s role – this links in with the competent employees role. The guidance also makes it clear that competence includes achieving a good standard of ethical behaviour. Firms need to decide what constitutes ethical behaviour in their particular area.
We have retained the retail exam requirements. This is because we believe that there is a continuing need for compulsory exam requirements in the retail sector. Exams essentially assess the knowledge component of competence and retail consumers are more reliant on firms’ employees having the relevant knowledge for their role. So we think that retail exam requirements are an essential part of consumer protection and that their removal is likely to lead to greater inconsistency and lower standards for retail consumers.
We have also kept the ‘safe harbour’ for firms that use exams taken from the FSSC’s list of ‘appropriate examinations’ and the FSSC continue to set the exam standards for the exams on its list.
Employees carrying out activities within the scope of the T&C sourcebook should be under appropriate supervision, whether they have already been assessed as competent or not. However, the level and intensity of that supervision will need to be significantly greater for those falling into the latter category.
Firms should be able to justify why a reduced level of supervision is appropriate for those employees it regards as competent and should set the supervision level taking into account how much relevant experience the employee has. You will have noticed that we have clarified the requirements regarding supervision by dispensing with the distinction between supervising and monitoring.
Interaction with other FSA workstreams
You will also have seen and heard a lot about the Retail Distribution Review (RDR). There is a close link between the T&C regime and the Professionalism and Reputation Strand of the RDR. We published our Discussion Paper on the RDR in June 2007 and the discussion period finished at the end of December. The responses we received are now being analysed.
We will continue to liaise closely with colleagues who are working on these projects to ensure a close fit between their work and the T&C regime.
How can firms benefit from our T&C regime?
It is important to remember that our rules simply set the minimum standards that we expect firms to achieve, especially in the area of assessing and maintaining competence. Employing competent staff also makes good commercial sense for firms. Well-trained staff create satisfied customers and this helps to retain and build business – a virtuous circle. It also helps to minimise the risk of mis-selling and the reputational damage this can cause.
So we hope and expect that firms will want to compete with each other above the minimum standards, thus driving up the general level of competence across the industry. The challenge for firms is to decide how best to benefit from the increased flexibility offered by the new T&C regime. This means that firms’ senior management will want to become more closely involved in how their T&C arrangements deliver the outcomes expected of them, including embedding a good management culture and appropriate ethical behaviours within their firm. We believe that this gives senior management greater flexibility to adapt their systems and procedures in the most cost-effective way for their particular business model. We also believe there is a role here for the trade associations and professional bodies to produce sector-specific industry guidance to help firms to meet our requirements.
In our opinion, the new T&C regime is much more user friendly than the previous regime – we hope you agree.
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