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Speak out on competence issues

The regulator has published a consultation paper on changes to its training and competence regime and industry players must make their opinions known, says Bill Warren

Last month I pointed out the close relationship between good training and competence structures in mortgage firms and delivering good quality advice as outlined in the Financial Services Authority’s recent review of the quality of mortgage advice. Since then, the FSA has published consultation paper CP07/4 entitled The Training and Competence Sourcebook Review. This sets out plans for “a shorter and more outcome-focussed” sourcebook”, described as “part of the FSA’s drive to simplify and streamline its Handbook and remove prescriptive requirements”.

Could this mean that T&C will be less important in future and that we won’t have to do so much of it? Although the phrase simplify and streamline might make it look as though firms will be expected to do less, this review is about replacing detailed rules with higher level rules and guidance.

So, it’s only the book that will shrink, not our obligations to ensure the appropriate level and quantity of T&C within our businesses. The press release accompanying CP07/4 contains a quote from Dan Waters, the FSA’s director of retail policy confirming the status quo on the T&C standards required by the regulator.

“There is no question of lowering the competence standards we expect of firms and their staff – these play a key role in protecting customers,” he says.

The FSA didn’t just wake up one day and decide to review its T&C rules. The proposed changes stem from the regulator’s need to integrate the European Commission’s Markets in Financial Instruments Directive into its own rules by November 2007. Because of the MiFID requirements, the FSA was obliged to remove detailed T&C rules for wholesale businesses – i.e. those not dealing with private clients – which inevitably would have an effect on the equivalent rules for retail firms.

Given this opportunity for reviewing the sourcebook and replacing detailed rules with a single higher level competence requirement, the FSA has to decide which of the old rules should be retained – at least for the time being. One key element of the rules where prescription is retained is the retail exam requirements – although these rules may be removed if the conditions for doing so are favourable – and the time limits specified for passing exams will be removed.

Along with ensuring that the new sourcebook complies with MiFID, the proposals in CP07/4 support the FSA’s better regulation agenda and its aim of moving towards a more principles-based regulatory regime.

It also supports the regulator’s approach to removing rules where the costs are no longer justified by the benefits. Overall, the aim is to give firms more flexibility to decide how to achieve the desired T&C standards while ensuring that consumers are appropriately protected. This is familiar ground, as we should now all be well aware of the concept that each firm must set up all of its compliance systems to meet its particular needs rather than ticking off a set of standard requirements.

CP07/4 also explains that MiFID contains a higher level competence requirement that requires firms within its scope to employ people with the skills, knowledge and expertise necessary to carry out the responsibilities allocated to them.

Skills, knowledge and expertise are already the cornerstones of T&C requirements and the proposed changes are only to reduce the detailed rules, not the principle or the desired outcomes. The consultation paper reminds us that T&C is relevant to three of the FSA’s principles for business – conducting business with due skill, care and diligence, organising and controlling affairs responsibly and effectively and treating customers fairly.

Another stalwart of the T&C regime that is destined to be scrapped under the proposals is the set of five “commitments” presently in place. These require that employees are competent, they remain competent for the work they do, they are appropriately supervised, their competence is regularly reviewed and their competence is appropriate to the nature of the business.

These commitments are not being scrapped because they no longer apply, it’s just that the MiFID competence requirements encompass them so there is no need for duplication.

Questions are listed in Annex 2 of CP07/4 and if industry players don’t respond they will be denying themselves the democratic opportunity that is being offered to them.

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