Retail Distribution Review CP10/12 is out and contains the FSA proposals in relation to competence and ethics. The regulator’s proposals and views are set out under a series of headings. Not surprisingly senior management and supervisors are a key part of the proposals:
Senior management and competence
It’s clear to everyone that the financial crisis exposed shortcomings in the governance and risk management of some regulated firms and the regulator intends to become more intensive in how they supervise significant influence controlled functions (SIFs). They have considered whether to apply specific qualification requirements to senior management but concluded that their revised approach to SIFs will be sufficiently stringent without imposing a qualification requirement.
They expect that the competency that needs to be demonstrated by SIFs should reflect:
- The type and size of firm;
- The role to be performed; and
- The mix of skills within the management team in which they will be operating.
The role of the supervisor within a firm
It is encouraging to see that the FSA considers the role of supervisors of trainee and competent individuals to be absolutely crucial. The TC sourcebook sets out requirements for supervisors, including the need for them to attain qualifications for certain activities.
Not surprisingly they have suggested that existing supervision is light on coaching and that there has been too much emphasis on monitoring. If you read back over some of our previous blogs you will see that we have both anticipated and welcomed this view. We have talked before about the “tick box” approach to training and competency and the requirement for greater alignment between the business training plan and the training & competency requirements. In the words of the regulator “a file check is not supervision.” It is clear that they want to see supervisors out in the field seeing what people actually do in practice and coaching performance.
The experience of the supervisors themselves was also discussed in the paper and the FSA expects them to have gained enough practical experience in the job themselves before taking on the role of supervisor.
Qualifications
The FSA proposes to update qualification standards every three years and to take control of qualifications from the Financial Services Skills Council (FSSC). A spokeswoman for the FSA said ‘This won’t necessarily change the level [four benchmark], the levels are set by the qualifications regulator and it’s not for us to say, but what we are doing is to make sure the qualifications keep up with activities of people in the industry.’
It will also seek to provide a greater consistency between qualifications so they all deliver the same required level of knowledge and skill.
The FSA view on Professional Qualifications
Where individuals are not engaging in regulated activity, the regulator has suggested that it is good practice to encourage people to take qualifications even if they are not required under regulatory rules. Their view is that this will help to raise standards across the firm. They have also challenged the opinion put forward by some that exam standards are covering a syllabus that is too wide and not relevant to narrower job roles by stating that consumers expect the individuals who provide them with advice to have a broad range of knowledge and understanding in order to understand the context around their specific area of advice.
They also talked about their expectations in relation to advisers being able to discuss a broad range of areas that might be of concern to the consumer such as the levels of compensation for different products and services. This would naturally be dealt with by firms under regular competence testing to cover basic regulatory requirements, products and services. However, once again they talk clearly about knowledge and skill and therefore the requirement does not stop at a regular test but extends into evidencing that the individual can discuss these products, services and issues in a live situation.
Time limit for Professional Qualifications
A time limit has been applied within which professional qualifications must be passed to allow the regulator to monitor firms’ compliance with the competent employees rule. This will apply one overall time limit of thirty months within which an individual must pass all modules of a qualification. This will of course only apply to those individuals who joined the retail investment advice sector after 30 June 2009. The responsibility for applying a time limit within which an individual needs to be signed off as competent overall rests with the firm.
What they have made clear in the proposal is they do not expect individuals to operate under supervision indefinitely OR to revert to operating under supervision as a way of avoiding the requirements under the Retail Distribution Review professionalism. So, those people who thought they could simply carry on as before but under the supervision of a qualified individual will have to think again.
Governance of competence arrangements within firms
The regulator has suggested that the responsibility for delivering competence arrangements within firms tends to be divided between the business, compliance and HR. They did feel however that the responsibility at board level is potentially unclear. They will therefore add guidance to APER which will say that “any approved person performing a significant influence function should take reasonable steps to satisfy themselves that each area of the business for which they are responsible has in place appropriate policies and procedures for reviewing the competence, knowledge, skills and performance of staff.
The challenge in the above will be in ensuring that you build process, procedures and systems that allow you to record, monitor and measure an individual’s performance and overall competence in a more complete way. This is not a bad thing for firms, in fact I believe it will drive up standards and that it will provide firms with a competitive edge. The trick will be in making the decisions now in relation to tackling the many Retail Distribution Review changes required that will see you through the longer term.
Alison Young - 24
th June 2010