Print this article

Competence in the New Regulatory Landscape

Chris Hamblin

Compliance Matters

14 October 2013

At last week's CISI 'training and competence' conference in London, Paul Slater of Coutts explained how compliance departments should assess people's competence at financial firms and make sure that their skills do not decay. Absolutely no mention of human resources departments was made by either the speaker or the delegates.

Slater began by observing that if the T&C team in question is evaluating a new entrant to the industry, the consequent bout of training is bound to take a long time. As things such as products and capital gains tax and income tax, not to mention regulations, are changing all the time in the wealth management world, he argued that skills were always having to change and that it was the compliance office's job to compel staff to keep abreast of these changes.

“If you're recruiting new individuals, look at their existing knowledge. They have have sat the derivatives exam, but can they work out how many call options to organise in a certain situation? Don't allow them loose on the clients until they are ready. You could issue a personal authority letter, saying 'you're not authorised to do it yet,' then another saying 'you are now a CF30, you can now do this.' This makes it explicit. It creates a demonstrable record. You can get them to sign it.”

He mentioned the retail distribution review's most well-known T&C requirement – that all retail advisers have to pass a 'level 4' exam. The requirements described in the RDR apply to retail investment advisers, whom the Financial Conduct Authority defines as employees who carry out activities 2, 3, 4, 6, 12 and 13 in Appendix 1.1.1R to the Training and Competence Handbook. (TC). The term 'retail client' is defined by the FCA (in COBS 3.4.1) as a client who is not a professional client or an eligible counterparty.

The Four 'legs' of T&C

Slater then produced a simple diagram which looked at four legs of the T&C process. Resembling a clock-face, it depicted the first quarter-segment as the 'on-boarding' process; the second segment, which went to the bottom, as the training stage; the third segment, coming up to the final quarter-hour, as 'attaining competence'; and the forth leg, coming back up to the top of the circle, as 'maintaining competence.' He had this to say about each of them.

On-boarding. Here it is worth asking whether the new arrivals have brought along their former CPD records from their previous firms. Reference checks and business checks are de rigeur at this stage.

The training stage. Here the compliance/T&C team could document their progress as they are trained to cope with systems or products they have not encountered before. This might include general complaints training and general compliance training.

Attaining competence. Here the training-and-competence team might carry out role-plays to ensure that the new advisers have completed their anti-money-laundering training or systems training to a good standard. Slater said blunty: “Can you afford to rely on the word of a former employer? The answer is no, isn't it?” He pointed to FCA rule 2.1.1 which states: “A firm must not assess an employee as competent...until the employee has demonstrated the necessary competence...and has attained each module of an appropriate qualification. This assessment need not take place before the employee starts to carry on the activity.” With this in mind, he said, the firm should make sure that the newcomers have the right qualifications before they are authorised to deal with the customers and even then they should remain under full supervision. Eventually it will be safe to place them on partial supervision, with an experienced individual who can give them feedback.

Maintaining competence. Slater pointed to FCA rule 2.1.12 which states that every firm must review its employees' competence regularly and frequently and take appropriate action to ensure that they remain competent in their jobs. He thought that this fourth area required less oversight than the other three. Any changes that happen to products should, he thought, occasion this process. All employees should complete a minimum of 35 hours of continuous professional development (CPD) work every year, of which 21 must be 'structured'. Many people at the conference talked about the disagreements between accredited bodies (ABs) about the nature of 'structure' and what the term should mean.

Knowledge, of course, decays over time and Slater thought that this was the main danger that this fourth stage of T&C was designed to ward off. He also made the very valid point that even someone who has passed an exam with a mark of 70% must be weak in some of the areas of his subject purely because he has not attained 100%. He was very enthusiastic about the use of surveillance on this leg of the T&C journey: “You can have T&C officers. They can listen in to the calls of portfolio managers and investment managers for T&C purposes. They can look at their interpersonal skills at the same time. Just because they have the knowledge it doesn't mean that they are good with clients in the live field. You could stage a team meeting. If someone isn't contributing well, maybe he's a bad advisor.”

The Next Stages for T&C

Slater looked at the challenges that T&C might face in the future, saying that the RDR had only imposed a “minimum standard” which would have to be improved on. One obvious area for improvement, he thought, was CPD, which at many firms is still thought to be something of an insubstantial formality. He looked forward to a time when it would become more 'qualitative'.

On the subject of market trends, Slater detected evidence that firms had been 'watering down their services,' especially in relation to clients with less than £500,000 in investible assets: “A lot of us believe that clients are still not trusting banks. Clients could be looking at acting on an execution-only basis. Will they be doing what's right for them?”

He also noted that the FCA had promised to be more interventionist than its predecessor, the body often derided as the Fundamentally Supine Authority. When asked whether the 35-hour rule was just for retail business he said that it was designed for that purpose but added that he knew of some firms that had applied it to T&C in all sectors. Ruth Martin, the managing director of the Chartered Institute for Securities & Investment, one of the largest ABs, said that all of her chartered members had to complete their 35 hours' worth of CPD irrespective of where they worked, i.e. irrespective of whether their field was retail advice or something else such as operations. For un-chartered members, she said that the CISI recommended the 35-hour minimum but did not yet insist on it. She agreed with Slater that many firms were now insisting on it 'across the piece' and not just in retail business as defined in the FCA's conduct-of-business sourcebook.