Investment in training and staff development is a given for any company that wants to attract and keep good staff. It makes businesses in all sectors more profitable and it helps employees to feel they have a real stake in the company they work for.
For Financial Services Authority (FSA) regulated firms, training and competence (T&C) has a significance far beyond good personnel practice, as it is a key feature of regulatory compliance. From the first step of gaining CeMAP, right throughout an adviser’s working life, there must be continuous assessment of T&C and development.
Inadequate schemes
So, how can firms achieve a T&C system that not only ticks all the right boxes for FSA compliance but also helps to build a stronger and more profitable business? A good place to start is the final enforcement notices recently issued to Hadenglen Home Finance plc, which included a financial penalty of £133,000, and to Richard Hayes, chief executive of Hadenglen, who was fined £49,000.
Both of these final notices specifically cited, among others, the failure to ensure adequate training and competency schemes. As far as the firm itself was concerned, the non-compliance issues regarding T&C included failing to take reasonable care to ensure advisers were capable of providing suitable advice; failure to assess staff competency on an ongoing basis; and no training at all on payment protection insurance products sold to protect the payment of secured loans. For the individual, the problem was the failure to implement adequate training and competency testing of sales advisers.
The reason that these enforcement notices are a good starting point is that they tie all the failings firmly back to the FSA principles that they have breached. In the case of the T&C failings, two principles were involved. First, principle three, which states that a firm must take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems. Second, principle nine, which states that a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement. As we move ever nearer the goal of more principles-based regulation, the more we think about the principles in relation to how we do business compliantly the better.
Getting it right
Having understood the dire consequences of failing to deliver proper T&C within a firm, what do we have to do to get it right? The answer to this question is contained in the T&C sourcebook within the FSA’s handbook. The T&C sourcebook has been under review since February 2007 with the feedback and final rules published at the end of July and implementation of the new final rules starting from 1 November. The reason for revising the T&C sourcebook is to introduce a more outcome-focused, flexible and user-friendly T&C regime with a sourcebook that is shorter and more principles-based.
Key elements of the changes include the scrapping of the five commitments to T&C and the introduction of a new, overarching competence rule in the Senior Management Arrangements, Systems and Controls sourcebook. This rule says a firm must take into account the nature, scale and complexity of its business, and the range of financial services and activities undertaken in the course of that business, when it decides how it must comply with the requirement to employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them.
‘Overarching’ is a very good description for this competence rule – but, as with all such high level requirements, it’s relatively easier for a firm’s senior management to understand this set of aspirations, but more difficult to turn them into a set of procedures that is right for their firm’s own circumstances. One big mistake would be to think that a shorter rulebook means that you have to do less about T&C within the business than you used to. In fact, it would be safer to take the view that the rules have been made simpler and more principles-based to stop firms getting away with too little, rather than to encourage them do less. So, rather than tearing up T&C procedures, it would be more prudent for the senior management in every firm to look again at their existing procedures to make sure that they truly reflect the needs of their individual business, as we move forward into a more principles-based regulatory environment.
Guides and framework
Back in the Summer of 2006, the FSA published a T&C guide for small mortgage and financial adviser firms, and it can be found in the small firms/ mortgages/good practice section of the FSA website. This guide covers the topics of assessments, T&C plans, supervision, competence, reviews, and monitoring of sole traders and partners. It is structured around good practice examples and, although it reflects the five commitments that will disappear on 31 October, it still provides an excellent framework on which to build a robust and effective T&C scheme that has proper systems and controls and delivers fair outcomes for customers.
Starting with recruitment, good practice includes credit checks, references and exam certificates being produced and held on file. Firms should understand the new recruits’ previous advice areas and make sure that they have a good knowledge of the products that the firm deals in. New recruits should also be tested on their knowledge of the firm’s systems and procedures. While new recruits are in the process of reaching the firm’s required levels of competence, good practice could include being supervised by way of regular one-to-one assessments and coaching using role play scenarios and observed client interviews. An appropriate level of file checking also needs to be maintained until full competence is achieved.
In my original enforcement example, one area where Hadenglen failed was in the ongoing checking and review of staff competence. The T&C guide is very helpful on this score, and suggests a number of good practices to ensure that employee competence is regularly reviewed. These include an ongoing development plan to address skills and knowledge needs, and the use of key performance indicators for regular measurement of ongoing performance against a firm’s standards. Continuous professional development activity, with the emphasis on quality rather than quantity is cited as good practice, as are regular one to one meetings. Annual fit and proper tests are also recommended.
The guide also covers the subject of a firm’s T&C plans, saying that ‘written plans can allow employees to understand how the firm’s T&C arrangements apply to their role’. Good plans would cover key elements such as roles and responsibilities, assessment of competence and training of employees, supervision, and monitoring. Regarding supervisors, firms should not forget to monitor their continued T&C needs to fulfil their roles adequately.
A trickier challenge
That’s an overview of what, essentially, a good T&C system should cover – whether it exists under a rules-based regime or a principles-based one. For many smaller firms, a trickier challenge is how to put it into practice, because understanding how good T&C works to uphold the FSA’s principles for business is not the same as being able to produce evidence that good T&C practice is being followed. As the enforcement example shows us, it is all to easy to start with good intentions about T&C, only to let the plan fall into disuse at a later stage. The fact that the key rules on T&C reside in the Systems and Controls part of the FSA handbook, and that one of the two principles cited in the enforcement example is number three – the one covering systems and controls – underlines the need to put proper systems in place.
As someone who is convinced of the power of automated processes, of course my view is that no firm can hope to keep its T&C regime under adequate systems and controls without using a dedicated IT system. With regular diary prompts, remote supervision facilities, circulation of news and reference material for ongoing awareness, and the capacity to keep fully documented records, combining a good T&C system within your IT infrastructure could prove to be the most efficient and cost-effective way to demonstrate how your firm is upholding all the principles that a good T&C regime supports.
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