MiFID II, SMCR, FEMR – The push for competent employees

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Over the last few years, the financial services industry has been presented with a series of regulations and guidelines: The Fair and Effective Markets Review (FEMR), the Senior Managers and Certification Regime (SMCR) and the Markets in Financial Instruments Directive II (MiFID II). All have had embedded in them comments on and requirements for the competence of employees. For each, training and competency professionals have then been asked to develop learning to meet each new requirement. There must be a better way. Luckily, we have on our side a player who has been doing this, in one form or other, for years: the Financial Conduct Authority.

In the Senior Management Arrangements, Systems and Controls (SYSC) sourcebook of the FCA Handbook is a section on skills, knowledge and expertise. The first rule in this section reads, ‘A firm must employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them.’ (SYSC 5.1.1) It is often referred to as the ‘competent employees rule.’ This should be the starting point for all training and competence requirements.

For certain firms, this is further qualified by the Training and Competency sourcebook, which adds to the definition of competence, ‘achieving a good standard of ethical behaviour’ (TC 1.1.4). This is more interesting given the recent focus on the need for ethical behaviour in financial services staff, as it was added to TC in 2007 when the sourcebook was still part of Business Standards. The Training and Competency sourcebook also includes the requirement to have ‘demonstrated the necessary competence …[and if required] …attained each module of an appropriate qualification.’  (TC 2.1.1). Even though the need for evidence required by each new regulatory development seems to come as a constant surprise. Yes, the Training and Competency sourcebook only applies to certain firms, but surely the need to be able to demonstrate competence should be as fundamental in T&C programmes as the need to demonstrate identity and source of funds in KYC procedures.

How much more needed to be said? Well quite a lot, it seems.

In July 2014, the FCA published its consultation paper in response to the Financial Services (Banking Reform) Act 2013 requirement to create a senior manager and certification regime (SMCR) alongside a new set of Conduct Rules. Part of this law covered the need for employees of relevant firms to be assessed as fit and proper and charged the regulator with creating rules around the qualifications, training, competence and personal characteristics required.

The danger of detail in training and competence is that it is explicit and safe and protects us from harm. If we tick off the details, we have fulfilled the brief. Why is this a danger?

The regulator stated that this had already been achieved, ‘ The FCA does not propose making new rules relating to these sections of FSMA. A number of general rules relate to these considerations,..and these existing rules will continue to be in force.’ (CP14-13 s4.5) It did, however, emphasise in COCON 2.3.2, ‘Suitable training should always ensure that those who are subject to the rules in COCON have an awareness and broad understanding of all of the rules in COCON, and that they also have a deeper understanding of the practical application of the specific rules which are relevant to their work’.’

In December 2016, the FICC* Market Standards Board (FMSB) produced a Statement of Good Practice: Conduct Training in response to the Fair and Effective Markets Review (FEMR) published in June 2015. FEMR had recommended the establishment of ‘new expectations for training and qualifications standards for FICC market personnel, with a requirement for continuing professional development. ‘ (Recommendation 1.b.) The FMSB concluded that, ‘the conduct issues experienced in FICC markets were generally not attributable to the absence of qualifications or technical competence, and therefore a higher priority for the market is to focus on conduct training within firms.’ (sII.4: Qualifications) This conduct training was also recommended to be focused very specifically by role. The FMSB is not a regulator, so this document possibly caused less of a stir than it should have. It does make clear, nevertheless, that the easy stuff is the technical training; the difficult stuff, is the conduct training.

Also in December 2016, the FCA responded to the European Parliament and Council Directive 2014/65/EU, (or MiFID II to you and me). MiFID II stated, in Article 25 (1), ‘Member States shall require investment firms to ensure and demonstrate to competent authorities on request that natural persons giving investment advice or information about financial instruments, investment services or ancillary services to clients on behalf of the investment firm possess the necessary knowledge and competence to fulfil their obligations.’ The European Securities and Markets Authority (ESMA) qualified this further in its Guidelines for the Assessment of Knowledge and Competence (Annex VI), stating in its general guidelines (Section V.I) that knowledge and competence should be:

  • Appropriate in level and intensity
  • Relevant to meet regulatory and legal requirements and business ethics standards
  • Relevant to the firm’s internal policies and procedures designed to comply with MiFID II
  • Demonstrated

We might be seeing the connections ourselves by now; the FCA are.

The FCA’s response is to add a rule that took ownership of the MiFID requirement and add a rule to SYSC 5 that amplified the competent employee rule. This latter rule brought SYSC more in line with the TC requirement, for those activities dictated by MiFID II. ‘ a firm must ensure, and be able to demonstrate to the FCA, … that any relevant individuals possess the necessary knowledge and competence’ (soon to be SYSC 5.1.5AB) and references the ESMA guidelines.

After two major pieces of regulation and one significant market review, where do we find ourselves? From a training and competency viewpoint, the regulator is saying what they always said, just maybe a bit louder.

It reminds me of some comments that I received when we started rolling out Certification Training where we emphasise the need to be able to give a satisfactory account of your actions and decisions. There were obviously those that looked at the change in focus, saw this as ‘bad’ and took offence that they were no longer trusted. There were many, however, who shrugged their shoulders and said, ‘If we are doing things properly in the first place, this makes no difference at all.’

This is clearly a summary account of the changes, and many may ask, ‘What about the detail?’

The detail is important, and, according to many idioms, that is where the Devil lies (or God, if you are of Ludwig Mies van der Rohe’s mind). Details, nevertheless, should be addressed only after the basics. It is no accident that ESMA stated its four general guidelines (the basics), before setting out more specific guidance.

The danger of detail in training and competence is that it is explicit and safe and protects us from harm. If we tick off the details, we have fulfilled the brief. Why is this a danger? It is a danger, because there are so many lists of details, and ESMA’s guidelines is just another one.

Possibly a better way is to listen to the focus of the regulator, ‘ A firm must employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them.’This suggests a role specific approach to training and development, rather than a content driven approach.

A role specific approach requires the firms to organise staff into distinct groups, for example, relationship managers, asset managers, dealers, operations, etc. The stakeholders in learning and development will then set out clear skills and knowledge requirements for each group. Getting agreement on this is clearly the difficult part. Once done, the common areas can be used to create core training throughout the firm. These may cover areas like codes of conduct, legal and regulatory requirements, policy and procedures, etc. The role specific training is then arranged for each group as satellite training.

Developing the structure is time consuming, but once established, the coverage and focus would meet the requirements of the regulations mentioned earlier. It would also allow a more targeted and meaningful presentation of the information for the recipients of training. In addition, it would provide a flexible framework for new training that needs to be implemented; decide who the training applies to, then add it to the core training or the satellite training.

A role-specific approach to training is easy to say, but difficult to set up; there are so many variables to consider. Nevertheless, the emphasis on knowledge and competence will not go away. The requirement to deliver a practical application of specific areas that are relevant to a specific role will continue to increase. The need to be able to demonstrate how the training and development added to the individual’s knowledge and competence will intensify.

A role-specific approach seems to be the route on which the regulators are taking us, or maybe it’s the route the regulators have always been telling us to take.

*FICC –  Fixed Interest, Currency and Commodity

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