Compliance Forum Margaret Spong 16 th May 2007

FSA CP 07/4 … and the SII’s strategy

Summary Highlights from our response F.S.S.C role Controlling CF 30 Influence of PBR, TCF and ethics T & C rules SII action

Our response We welcomed: -FSA valuing examinations, recognising their contribution to attainment of competence and retaining them for the retail sector with a safe harbour -EE reporting retail firms support for compulsory examinations -FSA maintaining competence through CPD -FSA promoting a good standard of ethical behaviour -The removal of time limits on passing exams

We also welcomed …. The application of the high level competence requirement to all UK authorised firms including wholesale.

MiFID Level 2 Article 5 and draft SYSC rules 3.1.6R‘.. employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them.’ 3.1.7R‘When complying with the competent employees rule, a firm must take into account the nature, scale and complexity of its business and the nature and range of financial services and activities undertaken in the course of that business.’

We have expressed concerns over: The exemption for staff of EEA firms – investors should be alerted if their adviser is unqualified Longer term disapplication of the retail T & C Sourcebook

We recommend that: Competence should be assessed regularly Additional emphasis should be given to CPD in maintaining competence Supervisors should continue to pass an exam The sturdy breakwater in SYSC and should be strengthened.

Draft SYSC and If a firm which is/is not a common platform firm requires employees who are not subject to an examination requirement to pass and exam from the list of appropriate examinations maintained by the F.S.S.C, the FSA will take that into account when assessing whether the firm has ensured that the employee satisfies the knowledge component of the competent employees’ rule.

The Financial Services Skills Council’s role Financial Services Skills Council holder of the ‘Appropriate Examination lists’ The Skills Council’s proposal to accredit T & C schemes The new ‘appropriate examination’ list for wholesale firms – unofficial advice

CP06/15 and Controlled Functions Proposal to merge all customer functions into one – CF30 – covering activities as diverse as: -advising on packaged products, -dealing in derivatives, -advising on Corporate Finance, -managing investments.

Influence of PBR, TCF and ethics

What changes will need to take place in firms? ‘It will require those who advise the senior management.. to embrace a new skill set. Rather than advising on specific rules, and the precedents … they will be required to take a wider and more judgemental set of decisions.. whether particular practices … are reconcilable with desirable outcomes and general principles.’

What does this mean for T & C? Do marketing and promotional staff really understand their new products? Are the products designed to meet client needs? Is advertising not just true, fair and not misleading but does it pitch the product at an appropriate level to the right target market? Do sales incentives maximise sales or incentivise sales to an appropriate audience? Are queries and complaints properly handled?

Last but not least ….. ethics The draft T & C rule 1.1.4G refers to ‘an employee’s ability to achieve a good standard of ethical behaviour.’ For clients to receive appropriate advice in a PBR world underpinned by TCF, staff have to work within an ethical framework. Ethics is driven primarily by the culture of the firm – but SII provides guidance through its code.

What’s happening with T & C? Mind bullet from the Chairman: -‘.. it should be the responsibility of those who manage wholesale firms to employ and train staff competent to do the job; and for them to decide on the appropriate tests, exams and qualifications they find most useful to deliver that outcome.’

Competent employees’ rule What does competence embrace? -Knowledge -Skills -Expertise ‘An individual must have the necessary technical mastery of his subject and the skills and expertise to apply that knowledge appropriately to practical, real- life situations.’ 1.1.4G ‘This includes an employee’s ability to achieve a good standards of ethical behaviour.’

Draft T & C rules – coverage Assessing and maintaining competence Supervising and assessing Examination requirements before starting activities Selecting an appropriate examination Training needs Maintaining competence Record keeping

Draft T & C rules – what’s gone? Mandatory exams for wholesale Time limits on passing exams T & C rules on Recruitment (current TC2.2) A lot of prescription

What’s new? Commitments in current rule book replaced by high level competence requirement in SYSC. New term ‘competent employees rule’ Explicit reference to ethical behaviour Optional for supervisors to hold an Appropriate Examination except possibly for supervisors of staff advising on packaged products A new format for the list of activities and products/sectors to which T & C applies.

Draft T & C rules – what have you got think about? What are your criteria for recruiting a new member of staff? 2.1.3G ‘A firm should have clear criteria and procedures relating to the specific point at which the employee is assessed as competent …’ 2.1.8G ‘… firms may wish to impose limits on the time they allow their employees to pass an appropriate examination or place limits on the number of times the exam can be taken.’

Implications for firms CF30 record change of role and exam taken Replacing the detail of the T & C sourcebook with your own criteria for recruitment and permitted exam attempts Document what led the firm to move a member of staff from ‘trainee’ to competent employee Checking what new staff know if the firm they are moving from does not use industry benchmark exams

What is the SII doing to respond? Exams CPD

Appropriate Examination list Supervisory roles of certain administrative activities As now but IAQ is top of the Appropriate Examination list: -Introduction to Securities and Investment Key 4 (industry awareness) -P-Principles of Financial Regulation /Financial Regulation Key 5 (regulatory knowledge) -I-IAQ technical units for certain Key 6 (technical knowledge) activities

November 07, advising and dealing in securities and derivatives - retail Introduction to Securities and Investment (1 hour) + Principles of Financial Regulation /Financial Regulation (1 hour) + Investment and Risk (1.5 hours) + Securities/Derivatives/Securities and Financial Derivatives (2 – 3.4 hours)

November 07, advising and dealing in securities and derivatives – wholesale Introduction to Securities and Investment + Principles of Financial Regulation + Securities /Derivatives / Securities and Financial Derivatives

CPD – what’s the SII’s response? CPD scheme – proving popular with firms Over 150 CPD events + Conferences and Training Courses More PIFs – new Wealth Management, Corporate Finance Webcasts, podcasts S&I Review Regulatory Refresher – with E-CPD modules under development Regulatory Update Infolink Sitting more exams – Diploma standalone units …..

Any questions?