Cicero Policy Briefer

Issue 10, March 2007

Retention of training and competence ‘rules’ welcome but more clarity needed

By Mark Twigg

After months of discussions and deliberations, the FSA proposals for reforming industry training and competence standards are a victory for common sense. The consultation paper (CP07/04) heralds a definite shift in the direction of more principles-based regulation, in confirming that the examination requirements for wholesale firms would be axed in line with previous consultation; in a move which is likely to be broadly supported by the industry the FSA will instead apply a high-level competence requirement in SYSC to wholesale businesses.

The outstanding issue centred on whether the regulator would follow suit with a ‘light-touch’ training regime for retail firms. The FSA’s cost-benefit analysis showed that 65 per cent of firms support the status quo; furthermore, the risk to consumers was also apparent, with 18 per cent of firms saying they would stop taking exams in the short term if the requirement was dropped. To add even more support to the status quo, the analysis ruled out the cost of compliance as a justification for reform, citing that the current exam requirements add only 0.01 per cent to the cost of investment products and 0.005 per cent to mortgage products (or one penny on a transaction worth £100), while the benefits include helping to mitigate against the adverse impacts of market failures such as information asymmetry and a reduction in consumer confidence. This cost-benefit analysis concluded that “with regard to the current regime, if exams were made no longer compulsory, the average level of competence in the industry would decrease.”

Faced with such evidence the FSA have decided to reduce the existing Training and Competence Sourcebook to around one-third of the current length, though crucially this will contain a small number of exam-related rules. This in effect retains a number of features from the current training regime, including:

• The current exam requirements for specified retail activities (TC2.1.1R)
• The FSSC safe harbour for firms who use exams chosen from the appropriate list (TC2.1.10E)
• The requirement to pass a regulatory module (TC2.1.6R) or an appropriate exam (TC2.1.7R) before starting an activity is also retained though on a simplified, risk-based approach.

In addition, the FSA proposes that the intensity of supervision will be “significantly greater” where the individual is not already assessed to be competent (TC2.1.3G). Throughout the whole pre-consultation process the FSA has been keenly aware of the potential impact on consumer protection. As the cost-benefit analysis highlighted, the FSA’s decision to retain exam requirements on retail business ensures “consistency in minimum entry-level knowledge standards and reduces the potential consumer detriment”. Scrapping the requirement would have sent the wrong messages to the market about the value of training.

However, this decision appears to be a temporary reprieve for those who have argued in favour of a more prescriptive rules-based approach. The FSA makes clear that its longer term aspiration is to remove the TC Sourcebook altogether and rely on high-level competence requirements across all sectors, including retail. There seem to be two key themes which the FSA cites to justify such a change in future regulatory requirements.

1. The first stems from treating customers fairly, the FSA’s major attempt to introduce principles-based regulation. In theory, the successful application of TCF could support the adoption of a more outcome-focused approach, giving firms more freedom to choose the most appropriate assessment method for them and holding senior management responsible for ensuring that staff attain and maintain competence. Again, most people in industry would support the rather obvious linkage between TCF and TC rules, though the obvious roadblock to date has been the lack of sufficient evidence to suggest that TCF has been properly embedded across the retail firms sector. The FSA has promised to keep the position with TC rules under review as TCF develops, but for now too many concerns exist over the ability of firms to look out for consumer’s interests under a principles-based approach.
2. The other consideration is the impact of MiFID, which will come into effect in November 2007. While MiFID will require some immediate changes to the TC Sourcebook, such as the removal of the need to sit exams within a specified timeframe, the broad thrust of it will remain unchanged. Under MiFID, firms passporting into the UK will not have to comply with the T&C rules, but will follow their own ‘home country’ rules, if any are in place. The FSA takes the view that the possible lack of training requirements on firms who are passporting retail MiFID business into the UK is unlikely to be a major competitive issue for UK firms, given that volumes of such business will be very low at the outset. As with developments in TCF, the FSA will need to keep this under review as the cross-border market for retail MiFID business develops. The CBA acknowledges that the FSA will have to “consider whether the current requirement will continue to be sustainable when such a requirement (to sit examinations) does not apply to all (EEA) firms”.

Subject to these two concerns the status quo looks safe for now, but what remains clear is the regulator’s desire to press ahead with more principles and fewer rules. One could be forgiven for looking at the FSA’s cost-benefit and concluding that, as the compliance costs are deemed to be relatively low and the benefits to consumers so apparent, that the need to change at all is dubious.

Nonetheless, the consultation asks whether there is a need to scrap the TC Sourcebook completely. In posing such a major question the FSA provides us with few signals as to when such a move would become a realistic option or how the potential drivers of change, TCF and MiFID, will force the pace of reform. For example, just how intractable is TCF as an obstacle and how long will it be—based on the current rate of progress—before firms will be deemed able to move towards a principles-based training regime? This date may arrive much quicker than some commentators think, and whether the proposals in CP 07/04 are nothing more than a short-term fix remains to be seen. For that reason alone it’s worth keeping a watching brief. The closing date for submissions is 23 May.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.

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