The European Securities and Markets Authority (ESMA) has issued a consultation paper on its draft MiFID II guidelines setting out ambitious skills requirements for staff in investment firms. The guidelines specify criteria for the assessment of knowledge and competence of staff in firms that provide advice or information about financial instruments, investment services or ancillary services to clients.
The consultation paper (CP) relates to the requirements set out in articles 24 and 25 of the MiFID II Directive. The CP aims to set a knowledge and competence framework of principles, which Member States will then supplement with more detailed local criteria.
The draft guidelines cover:
- investment firms within Art 4(1)(1) of MiFID II
- credit institutions when providing investment services;
- UCITS management companies (see Article 6(3)(a) and (b) of the UCITS Directive);
- external Alternative Investment Fund Managers when they are providing the investment services of individual portfolio management or non-core services (see Article 6(4)(a) and (b) of AIFMD);
- staff - natural persons (including tied agents) - providing relevant services to clients on behalf of the investment firm;
- relevant services – providing investment advice or information about financial instruments, structured deposits, investment services or ancillary services to clients.
Knowledge and competence
National Competent Authorities (including the Financial Conduct Authority) will set designated levels of knowledge and competence that staff at investment firms will have to reach. These will be underscored with
- an "appropriate qualification" and
- "appropriate experience"
both of which are defined in the guidelines (albeit in a fairly limited way).
What do staff need to know?
Staff will need a detailed knowledge of a broad range of topics, covering:
- the key characteristics, risks, complexity, and total costs of relevant products or services – as well as general tax implications for the client, whether the product or service is suitable for the client (and how it may not be suitable) and principles of portfolio theory;
- how the market functions, market structure, and the impact of economic data;
- how to use relevant data sources and valuation principles;
- market abuse; and
- the relevant regulatory requirements and the firm’s internal procedures designed to ensure compliance with MiFID II.
Added to this, staff must contextualise this knowledge so they:
- understand when the firm is acting in the best interests of the client;
- know how to meet ethical standards;
- act in line with a firm's internal policies and procedures (e.g., conflicts, complaints management, product governance, telephone recording, and client order handling).
Some might be relieved by the potential grandfathering provisions for staff with not less than five consecutive years of experience.
Areas of concern
An element of divergence may arise between Members States, which can either set a list of appropriate qualifications or the criteria against which an appropriate qualification needs to be assessed. There is also room for flexibility in relation to the experience component. While this less prescriptive approach may be welcome, it may of course, cause an additional layer of fragmentation for firms operating in several Member States.
The definition of "appropriate experience" would benefit from enhancements. Currently, this requires staff to demonstrate their ability through recent work combined with length and continuity of service measures. Hopefully, ESMA will refresh its wording in the next iteration, but firms should ensure their policies and expectations do not give rise to a source of indirect discrimination claims (e.g. around parental or adoption leave, part-time workers, disabilities, etc). Thought must also be given to the effect of short or unplanned breaks, perhaps caused by brief periods of involuntary unemployment. To this end, firms may want to look at the approach to professional standards taken in other industries (e.g., The Solicitors Regulation Authority, the General Medical Council, Regulated Immigration Advisers, and ACCA).
The guidelines envisage that firms will be permitted to take a proportionate approach, reflecting the nature, scale and complexity of their business and the range of financial services and activities undertaken by the firm and specific staff. Requirements vary (slightly) between those in advisory roles and those "giving information". This is line is not always distinct, and deserves careful consideration in macro and micro terms (business strategy and when designing training or qualification standards).
Providing "information" (rather than advice) basically amounts to handing over marketing information. Given the elevated expectations of what amounts to knowledge and competence, an adverse unintended consequence could be a reluctance for firms to offer information only where there is a staff member present or to require customers to see advisors for fairly basic queries.
- Compliance teams need to assess and review standards.
- Senior personnel should interrogate their management information to assess the effectiveness of the overall control environment.
- HR will deal with the logistics of a training programme and the fallout from any knowledge and competence shortfalls.
- Staff should engage in continuous professional development.
Many UK firms will already be looking at the requirements of the new Senior Managers Regime and the linked certification and conduct standards, to be in place from March 2016. The Bank of England's report on its Fair and Effective Market Review makes 21 recommendations, and many of those relate to qualification standards and conduct with potential to affect MiFID firms. Additionally, while the FCA has a fairly mature training and competency framework, we would expect this to be amended for MiFID II and for adherence to be reviewed in the long term, not least because this is an area which plays to the political and public galleries.
We believe it is important to spend time considering your firm's approach as these draft guidelines further underline the message in MiFID II that firms need to have well-defined compliance standards, demonstrably suitable for their particular business.
- Senior business leaders are ultimately responsible for steering firms through the inevitable MiFID II driven changes and on-going organisational compliance.
- Given the breadth and current vagaries of these guidelines, HR input will be vital, working closely with regulatory experts and staff representatives (including trade unions where recognised).
- Compliance with these standards needs to be factored into product development and governance procedures and reflected in commercial assessments of products.
The consultation period closes on 10 July 2015, with a final report expected in the fourth quarter of 2015. The FCA is likely to consult on this in early 2016, with the final guidelines taking effect from 3 January 2017.