|
Financial Services Employers - are your staff competent?
By Alan Burr, Burr & Company
Put to one side, if you can dare to for the time being, the sub-prime credit crisis; the UK financial regulator, the Financial Services Authority (FSA) is presenting some major challenges to firms in parallel with this, none of which can be avoided by authorised firms. Hence, financial services firms already preparing for the weighty impact of the pervasive and long-awaited MiFID (or Markets in Financial Instruments Directive), which is scheduled for implementation Europe-wide from November 1st this year, will also find themselves subject to a further “triple–whammy” as there are other significant regulatory handbook changes also coming into force at the same time. I refer of course to the FSA’s revised Approved Persons regime and the Training and Competence Sourcebook plus the move to outomes-focused, principles based regulation. A lot to take on board for any firm!
Approved Persons
Under its Approved Persons regime changes, FSA announced in February this year that it will merge the customer functions into one single category; there have erstwhile been seven separate classifications. They will introduce a new customer function (number 30) which will encompass all previous customer facing functions. The upshot here is that there is expected to be a significant saving of time and cost to some 9,000 firms as they will no longer be required to submit forms to the regulator to update them as to the comings and goings of individual members of staff when customer functions are changing within their organisation. This is expected to deliver roughly a saving of £1 million to the industry, the FSA estimates. They realised at the time of their market consultation that the costs (to be saved) outweighed the benefits they brought. So, a sensible outcome here then.
Training and Competence
The Training and Competence regime changes however are causing rather more concern to people in the industry. In a nutshell, the FSA is removing the requirement for firms engaged in the wholesale (or non-private customer) financial markets to have their staff sit, and of course pass, qualification exams. Instead, they must meet a new “competent employee” rule. This will not apply to firms dealing with retail clients as, in these cases, examinations will still most certainly be necessary. The FSA insists that the simplification of its Training and Competence (T&C) Sourcebook does not indicate a lowering of standards, especially by definition in the retail sector. Basically, the FSA has significantly shortened its T&C rulebook and moved it to being more heavily based on principles.
The FSA consultation papers of CP05/10 and CP07/4 have lead to important differences between wholesale and retail in the way employees’ training and competence is regulated by the FSA, also linked to the new MiFID requirements in training and competence.
Will the new approach lower standards? The FSA has denied strongly that this represented in any way a lowering of the standards required from authorised firms. They prefer instead to stress how the process has been simplified and will give greater flexibility to practitioner companies as it is expected to be easier and more straightforward for firms to administer.
FSA has also introduced a new "overarching competence" in its Senior Management Arrangements, Systems and Controls Sourcebook, which will apply to all UK authorised firms, including wholesale firms. It replaces the training and competence commitments set out in the current T&C sourcebook. The new requirement says that firms must employ personnel with the necessary skills, knowledge and expertise for the jobs they perform to suit the nature of the firm’s business. The competent employee rule, which is based on the competence requirement drawn from MiFID itself, introduces an additional test over and above current T&C requirements.
Examination requirements
As indicated therefore, exam requirements (or lack of them for pure wholesale firms) are attracting much attention. Some firms may prefer to continue to employ accredited exams for their client-facing staff in the wholesale sector. Others may prefer to introduce alternative means of proving competence from in-house assessment approaches. Whichever they decide, the FSA will examine whether, in its opinion, firms are operating sufficiently robust systems to certify that their staff are competent and remain so for the jobs they undertake. FSA has powers to enforce its training and competence requirements and may take action against firms who breach the rules. The new regime is more flexible in theory but many firms are already saying that they intend to stay with the tried and tested exam route. Some firms operate in both the wholesale and retail sectors and may wish to have an holistic approach to staff recruitment, training and development which will retain a substantial exam element.
For retail firms, the existing examination requirements remain. This is directly in keeping with the FSA’s risk-based approach, where it is always held that firms dealing directly with end consumers potentially pose the greatest risk to the regulator.
From 1st November 2007, employees advising and dealing on behalf of non-private clients will be subject to FSA’s high level competence requirements set out in SYSC 3.1.6/7 but no longer subject to the T&C Sourcebook. Firms which require their employees to pass an exam on the Financial Services Skills Council (FSSC) list of appropriate examinations will benefit from the protection or “sturdy breakwater” offered by SYSC 3.1.10 and 5.1.5. Under these clauses, FSA will take account of an exam pass as satisfying the knowledge component of the competent employee rule.
Also from 1st November 2007, employees advising and dealing on behalf of retail clients (which could include a number of investors which have opted to be treated as retail clients under MiFID) will be subject to FSA’s T&C Sourcebook and the FSSC’s appropriate examination list. A major change in the T&C Sourcebook is that the time limit on passing examinations has been removed. In its place, firms are expected to impose their own time limits and closely supervise staff until they pass the required examinations.
People working for authorised firms will be subject to the new competency rules and must remain competent in an ever-changing industry. It will be up to the firm and the individual to decide how to approach the new regime, a feature of which will be the requirement to record a person’s CPD (Continuing Professional Development) record. Those working in the retail space will be subject to more detailed review and research with compulsory examinations. It will be a responsibility of the employers to assess competence and maintain competence as staff change jobs within a firm. It may be a challenge for firms to assess the competence of new employees joining from other companies where different approaches to competence are operating. This may pose a question for employers where the overall job market (and the competence elements across its entire scope) will be more difficult to assess. Note also that ethical behaviour will become part of competence oversight.
In support of the required exam infrastructure is the organisation known as The Financial Services Skills Council (FSSC). They are to set up a recommended list of exams for the guidance of wholesale firms. Such exams on the FSSC’s list of appropriate examinations will be recognised by FSA as showing evidence of competence but exams will not necessarily be accepted as a "safe harbour” or absolute proof that staff members have been trained properly and are indeed competent. FSA proposes to take existing exams into account in assessing compliance with the knowledge component of its new competent employee rule in its SYSC 3.1.10 and 5.1.5.
The FSSC has indicated that it will produce and maintain a separate list of recommended examinations, which will include a broader range of exams than those on the list of "appropriate examinations". The new list will be more flexible and structured around job roles. The list will have a greater focus on the wholesale market side and will be linked to the full range of FSSC’s national occupational standards, while the list of appropriate examinations will take on more of a retail focus.
Client reclassification under MiFID
One of the many significant impacts of the expensive MiFID changes is that clients’ classifications are being reshaped. There will be three future categories, as indeed there are now, but the rules defining each are changing. As a result, it is likely that more clients are going to be recognised as retail clients under MiFID than under its current category of private customer (similar but not equivalent) because the present “intermediate” level customers will not map across en masse to the new MiFID “professional” category. The overall effect therefore is expected to lead to a demand for more examinations as the number of clients and practitioners affected will increase.
Staff Training
As a result, forward-looking employers will be examining their approaches to staff training. This will be seen in particular within firms operating in the areas of securities trading, investment fund management, derivatives and corporate finance. The insurance sector similarly will be under the spotlight as the FSA is currently looking at introducing different regimes for different general insurance products, where protection-based products are deemed to be higher risk.
The new regime comes into effect on November 1st. Can you prove competence?
ALAN BURR
Burr & Company
September 2007.
|
