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Feature: Responsibility, Competence and Change: Compliance in 2005


Peter Freeman, Head of Compliance at 7city Learning looks at the challenges facing training managers in the financial services sector in 2005.

The one thing in life that is certain is change. In financial services, that changes will involve the regulations that control our industry is a total certainty. Since the Financial Services Act came into force we have had several major overhauls of the regulatory system, not least of which being the new Financial Services and Markets Act (FSMA). Since then, as an industry we have seen over 300 consultation papers, discussion papers and policy statements from the FSA, innumerable pieces of secondary legislation, and now it is going to face major overhaul just as the Treasury completes its two year review of FSMA.

The source of future changes
Aside from any changes that simply arise from review and experience on the part of the FSA and HM Treasury, the EU has embarked upon a drive to complete a single European capital market. This is encapsulated in the Financial Services Action Plan (FSAP), which to give you a view of its scale encompasses over 40 separate sets of rules regulations and directives, all of which will be brought into force across the EU in the next few years. These include such major revisions as a whole new directive to replace the existing Investment Services Directive (ISD), the snappily entitled Markets in Financial Instruments Directive; significant changes in the field of prospectuses and listing with a new directive. Also new directives on distance marketing, market abuse, transparency obligations, insurance, and international reporting standards are just some of those major changes for firms in the financial services industry.

Coping with change
Those who have a senior management role in any financial services firm need to recognise that they have a responsibility for ensuring that they and their staff remain competent to do their jobs. At its simplest this means that employees performing a function must know and understand the new rules that will flow from the changes outlined above. It is also not realistically good enough to simply respond to the new rules when they are published and then spend whatever transitional period that might be allowed implementing the changes. It must surely be more effective and better management to anticipate the changes and to develop and implement strategies ahead of your competitors or indeed of the FSA telling you that your response has been inadequate.

Senior Management responsibilities
At this point it is worth emphasising a new message coming from the FSA, which is that failures by a firm arise from individual senior managers failing to perform their own jobs properly. A failure of a firm to have adequate training and competence criteria procedures in place to ensure that staff are competent isn’t a failure by the “firm” but by the managers responsible for those employees. The FSA has sent a very clear message that to date the “firm” has borne the brunt of discipline when in reality it is individual managers who are truly responsible. This should focus the mind of every senior manager in the industry as it is their career and reputation that is at risk.

Managing competence
As an industry the focus of training and competence has been driven by the need to meet threshold competence or by statutory requirements for updating such as under the money laundering regulations. We believe that this has lead to a dangerous under-emphasis on the bigger issue of maintaining competence. No firm in the industry continually recruits staff to replace its existing staff base, yet often that is the only time at which an assessment of competence will be made. In reality the firm needs to ensure that its existing staff remain competent, that means that they need to remain up to date with both regulatory and product developments. If not then from the day they were assessed as competent they become more incompetent (or less competent if you prefer) until a failure point is reached. If that employee is an Approved Person then they have an individual responsibility to maintain competence, and their managers also carry a responsibility to ensure that their subordinates take steps to remain competent.

Ensuring competence
Clearly there is a larger task for firms in the industry as we move from a focus on initial competence to maintaining and enhancing competence. The number of “old” staff compared to “new” staff shows that this will be a greater issue to be tackled. That this will have to be tackled in the face of a deluge of changes emanating from regulators seeking a harmonised approach across all member states, rather than in a “static” environment adds to the burden.

The existing approaches of sending recruits on a course to pass an appropriate exam, do not work for staff who have already been assessed as competent. They need to have relevant updates tailored to their actual function; the firm also needs to be able to demonstrate that it has taken reasonable steps to maintain competence, which means record keeping. It also means that a firm has to be able to demonstrate competence, which means that criteria for assessment needs to be set against which individuals are assessed, with remedial training provided where criteria are not met. The firm also needs to know that its training provision is effective so the training outcomes need to be assessed as well.

An insoluble burden?
New approaches have to be taken. With our clients, we have been exploring new ways of ensuring that staff remain competent through on-line updating, recording and evaluation. Often this requires more in-depth analysis of the criteria for competence. Sometimes this is part of the training manager’s role, at others it falls more appropriately as part of the compliance officer's risk control programme. In reality it is the responsibility of every approved person, whether a senior manager or not, to ask the questions “how do I know we have competent staff?” and “how do I know I am competent?”
Once those questions have been asked then developing training solutions that work for is just another specialist service. What is certain is that in a time of increasing change doing nothing is a recipe for disaster, not just for the firm but for those individuals with responsibility. For training managers the good news is that their role is not a controlled function, but it should focus the minds of compliance officers and senior managers on training in 2005 like never before.

Before joining 7city Peter Freeman was director of compliance and markets at OFEX, where he was responsible for creating with the FSA the regulatory structure for the operation of London’s junior equity market. He has also worked with the FSA and HM Treasury and other Exchanges on the development of the EU’s Financial Services Action Plan, as well as changes to the legislation in relation to the Code of Market Conduct, Finance Act and Pensions.


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