ESMA – Assessment of knowledge and competence

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Advice or information?
The old adage of whether a client receives advice or just information is very much the thrust of the Final Guidelines from the European Securities and Markets Authority, ESMA, on the assessment of knowledge and competence which comes into force with the implementation of MiFID II.

Oh, I hear you say, I don’t need to read this; MiFID II has been pushed back to January 2018 – plenty of time to address the requirements.

Humour me – take yourself back to 2012, the last year before implementation of the RDR, or MiFID in 2007 or for those of you in relevant firms, more recently, the implementation of the Senior Managers Regime in March of this year.

Was time on your side?

Or was it a last minute panic to get everything in place by the implementation date?

Grandfathering
If you also believe there’s no rush as grandfathering is an available option, you may want to think again:

People can be grandfathered, under the ESMA guidelines, with a minimum of one year in the post of providing the relevant services. However, the grandfathering is only valid as long as the employee remains with the present employer. If they move firms to undertake the same role the grandfathering stops. Great as an employer, attrition will go down but if you choose to grandfather, the firm is ultimately liable and responsible for what the grandfathered individuals do.

If the firm ‘carries the can’ how responsible is the grandfathered individual going to be in executing their role?

You and I know that a client does not differentiate between information/guidance and advice.

Grandfathering does not exempt the individual from the annual competence assessment which is covered further on in this article.

In the recent Financial Advice Market Review (FAMR) jointly conducted by the FCA and HMT many firms told the FCA they were reluctant to give “guidance” (information) to people for fear of inadvertently stepping into regulated advice.  Tracey McDermott, Acting Chief Executive, FCA, in a recent speech, delivered at the Westminster and City industry forum on FAMR, said “not all consumers need regulated, individualised financial advice. For many, guidance and other forms of support will be sufficient to allow them to make an informed decision”.

You and I know that a client does not differentiate between information/guidance and advice.

The ESMA guidelines recognise this and have put in place requirements for firms to address this situation.

Not only avoiding the last minute costly panic

Over the rest of this article I will attempt to demonstrate that by beginning to address these guidelines now within your firm you will:

  • avoid that last minute “costly” panic to get relevant requirements in place,
  • ensure clients will receive the information or/and advice that is right for them – positively affecting the firms ‘bottom line and,
  • protect your staff and the firm from giving unqualified or wrong advice.

Let’s start with the basics, a definition from ESMA on what giving information is:

“Giving information” means directly providing information to clients about financial instruments, structured deposits, investment services or ancillary services, either upon the request of the client or at the initiative of the firm”.

This is not specific / personalised information as this of course would be advice.

ESMA expects their guidelines on assessment and competence “to promote greater convergence in the knowledge and competence of staff providing investment advice or information about financial instruments, structured deposits, investment services or ancillary services to clients”.   The ultimate objective being  to “assist firms in meeting their obligations to act in the best interest of their clients and to assist CAs (Competent Authorities) to adequately assess how firms meet these obligations”.

The guidelines are minimum standards for the assessment of knowledge and competence for staff providing relevant services (investment advice or giving information on investment products and services). So what are the minimum standards?

ESMA are keen to stress that the level and intensity of knowledge and competence expected for those providing investment advice should be of a higher standard than those that only give information on investment products and services – but by how much?

The table below demonstrates what is required by those giving information compared to those giving advice:

The coloured boxes highlight where the standard is fundamentally the same. (The letters under the standard column bear no correlation to any other document).

When reading the information in the table please take into consideration that the FCA already requires higher minimum standards than those required by ESMA for those individuals who give investment advice.

 

Standard Giving information Giving advice
a Understand the key characteristics, risk and features of those investment products available through the firm, including any general tax implications and costs to be incurred by the client in the context of transactions. Particular care should be taken when giving information with respect to products characterised by higher levels of complexity Understand the key characteristics, risk and features of the investment products being offered or recommended, including any general tax implications to be incurred by the client in the context of transactions. Particular care should be taken when providing advice with respect to products characterised by higher levels of complexity
b understand the total amount of costs and charges to be incurred by the client in the context of transactions in an investment product, or investment services or ancillary services; understand the total costs and charges to be incurred by the client in the context of the type of investment product being offered or recommended and the costs related to the provision of the advice and any other related services being provided;
c understand the characteristics and scope of investment services or ancillary services;

 

d fulfil the obligations required by firms in relation to the suitability requirements including the obligations as set out in the Guidelines on certain aspects of the MiFID suitability requirements
e understand how the type of investment product provided by the firm may not be suitable for the client, having assessed the relevant information provided by the client against potential changes that may have occurred since the relevant information was gathered
f understand how financial markets function and how they affect the value and pricing of investment products on which they provide information to clients understand how financial markets function and how they affect the value and pricing investment products offered or recommended to clients
g understand the impact of economic figures, national/regional/global events on markets and on the value of investment products on which they provide information understand the impact of economic figures, national/regional/global events on markets and on the value of investment products being offered or recommended to clients
h understand the difference between past performance and future performance scenarios as well as the limits of predictive forecasting understand the difference between past performance and future performance scenarios as well as the limits of predictive forecasting
i understand issues relating to market abuse and anti-money laundering understand issues relating to market abuse and anti-money laundering
j assess data relevant to the investment products on which they provide information to clients such as Key Investor Information Documents, prospectuses, financial statements, or financial data assess data relevant to the type investment products offered or recommended to clients such as Key Investor Information Documents, prospectuses, financial statements, or financial data
k understand specific market structures for the investment products on which they provide information to clients and, where relevant, their trading venues or the existence of any secondary markets understand specific market structures for the type investment products offered or recommended to clients and where relevant their trading venues or the existence of any secondary markets
l have a basic knowledge of valuation principles for the type of investment products in relation to which the information is provided have a basic knowledge of valuation principles for the type of investment products offered or recommended to clients
m Understand the fundamentals of managing a portfolio, including being able to understand the implications of diversification regarding individual investment alternatives.


Is there a big difference in competence levels for those giving information compared to those giving advice?
I would like to think the table speaks for itself in answering that question.

So what is the expectation for assessing, validating and maintaining competence of these relevant individuals?

Don’t wait for the accredited bodies to come out with a new qualification for people giving information on investment products and services – you can see by the table above the qualification will be at the very least a level 3 – arguably higher.   Give people as much time to attain it as possible.

Different expectations
It’s no different to what you should be doing now for those people that give investment advice or sit in the certification regime under the Individual accountability framework in banking (SMR):

  • Ensure that staff providing relevant services have the necessary knowledge and competence to meet relevant regulatory and legal requirements and business ethics standards.
  • Staff know, understand and apply the firm’s internal policies and procedures designed to ensure compliance with MiFID II requirements. This is aligned to the services the firm provides and whether they give information or advice.
  • Relevant staff will need an appropriate qualification (unless grandfathered) and will not be able to see clients unsupervised unless they have “gained appropriate experience in the provision of relevant services to clients” – i.e. be signed off as able to competently undertake their role as per the standards above.
  • It is expected that firms will carry out an assessment of competence at least annually and hold evidence to prove they have assessed people’s competence and they hold the relevant qualification. This assumes firms have robust records and are able to provide relevant MI to both the Board and regulator when required.
  • The qualification is evidence of a certain level of knowledge so if individuals are grandfathered the guidelines imply their industry knowledge will need to be tested by other means.
  • Continuous professional development will apply across the board irrespective of whether an employee holds a relevant qualification or has been grandfathered.
  • If relevant individuals are not assessed as competent they cannot provide the relevant services unless under supervision by someone who is a competent supervisor i.e. they have the same required level of competence or above.

Isn’t this the same old, same old?

It is what you should be doing now.
The big difference is the number of additional people you will have to assess as competent and who will need to hold an appropriate qualification:

  • Discretionary Investment managers who only “give information” at the moment so were not required by the retail distribution review to be qualified.
  • The analysts on the research desk who are asked to attend client interviews or presentations to give the “firm view”
  • Investment assistants who often give a lot more information to the clients than the portfolio manager.

Don’t wait for the accredited bodies to come out with a new qualification for people giving information on investment products and services – you can see by the table above the qualification will be at the very least a level 3 – arguably higher.   Give people as much time to attain it as possible.

Identify the people in your firm who will be affected by these requirements and ensure they have the necessary knowledge, competence and qualification.

Protect your people, your clients and your firm by taking advantage of the time you have.

This all sits very comfortably within the requirements under the SMR already underway in banks, building societies, credit unions and designated investment firms.

Irrespective of the outcome of the referendum, the SMR will apply to all regulated financial services organisations by 2018, any work you do now or money invested in preparation will not be in vain.

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Philippa Grocott

Business Development Partner Financial Services Training Partnership

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