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Regulated firms face new minimum competency regime

Joe Beashel of Matheson Ormsby Prentice outlines the Financial Regulator's proposal for minimum competency requirements that is set to begin in January 2007. The requirements impact all financial services providers who engage with customers where the customer seeks retail financial products.
The Financial Regulator has indicated that it proposes to implement a scheme of minimum
Joe Beashel

competency requirements across all financial services providers where consumers seek advice on, or seek to purchase, retail financial products. For some sectors, such as those providing certain types of consumer credit, these will be very significant changes and will require careful consideration of current business processes. The consultation process for this change started as far back as April 2004. In February of this year, the Financial Regulator issued a further ‘limited consultation’ paper (CP14) (the ‘Consultation Paper’) which details the proposed regime and seeks feedback on a number of specific questions. However, it has made clear that it does ‘not intend to alter the fundamental structure of the proposed requirements’. The closing date for submissions is 31 March 2006.

Accredited individuals
So-called ‘accredited individuals’ will be required to have minimum qualifications and to undertake a programme of continuing professional development (‘CPD’). These requirements apply to individuals, who on a professional basis, as, for or on behalf of a regulated firm:
  • provide advice to consumers on retail financial products
  • arrange, or offer, to arrange retail financial products for consumers
  • undertake certain specified activities


Individuals whose only investment activities consist of referring customers to regulated firms are only required to ensure that on a ongoing basis they know the different types of entities regulated by the Financial Regulator and know the different registers maintained by Financial Regulator.

Where a regulated firm takes full and unconditional responsibility for the investment business activities of tied agents or others, the regulated firm is required to monitor the compliance with the minimum competency requirements of those tied agents or others and ensure that any qualification is appropriate to an individual’s role and is relevant and up to date.

A regulated firm will be required to maintain a register of accredited individuals acting as, or for on behalf of, the regulated firm and this register must be made available to public on request.

Grandfathering

Individuals who have considerable experience in a particular area will not be required to obtain a qualification but will be permitted to ‘grandfather’ by virtue of their experience and will only be required to comply with the continuing professional development obligations (see below) on an ongoing basis.

Individuals who do not have an enough experience to be grandfathered will be allowed four years to obtain an appropriate recognised qualification.

Individuals who are new to the industry, that is who commence for the first time to act as an accredited individual on or after the 1 January 2007, will be allow four years to obtain the recognised qualification. Prior to dealing with retail consumers, these individuals must undergo a training programme or obtain a part recognised qualification and they must be supervised by another ‘accredited individual’ until they themselves receive ’accredited individual’ status.

To avail of the grandfathering provisions the Financial Regulator has not yet decided whether to require four years or over six years previous working experience in the relevant area.

Grandfathering will only apply to the particular expertise of the individual, if they move to a new area will be required to meet the full qualification requirements.

Continuing professional development (CPD)
Accredited individuals will be required to comply with a minimum CPD requirement of 60 hours in a three year cycle of which least 40 must be formal CPD. The balance of 20 hours may be wholly comprised of either formal or informal activities or may comprise of a mix of formal or informal activities. The Financial Regulator has reserved the right to check any individual’s compliance with the CPD requirements during the course of an inspection of a regulated firm.

Retail Financial Products
The new obligations apply to the provision of advice or arranging retail financial products. These are divided into six categories:

  • Life Assurance Protection Policies
  • General Insurance Policies
  • Quoted Shares, Bonds and other Investment Instruments
  • Savings, Investment, and Pension Products
  • Housing Loans and associated insurances and
  • Consumer Credit and associated assurances

    An appendix to the Consultation Paper sets out the minimum competency requirements for each category of retail financial product and a further schedule sets out the current qualifications that are recognised by the Financial Regulator as applying to each category.

    Consumers
    Two definitions of consumer are relevant. For consumer credit agreements, the definition in the Consumer Credit Act, 1995 applies, that is ‘… a natural person acting outside the person’s business…’. For all other retail financial products and related financial services, consumer has the same meaning as that used for the Financial Services Ombudsman Scheme i.e. a natural person when not acting in the course of or in connection with the carrying on of business but including partnerships, clubs, charities and incorporated bodies with a turnover of €3 million or less.

    Advice
    Advice is defined as ‘advice provided to a consumer to enter into or to become entitled to benefit under, terminate, exercise, any right or option under, or take any benefit from a specific retail financial product’.

    A number of activities are excluded from the definition of advice including:
    • the provision of a brochure or booklet to a consumer without the provision of advice to that consumer
    • advice, whether given in a newspaper journal, etc, advice given in lecture seminar, etc. advice given in a sound or television broadcast where the purpose of these communications, taken as a whole, is not to lead consumers to a specific retail financial product or any specific provider of such product


    Specified Activities
    In addition to providing advice and arranging consumer financial products, certain specified activities will be subject to minimum competency requirements. These are:
    • assisting in the administration or performance of claims under contracts of insurance
    • being directly involved in reinsurance mediation
      the direct management of accredited individuals
      acting on behalf of a regulated firm in adjudicating on any consumer complaints
      Regulated firms will therefore need to consider who, beyond front line sales people, fit these categories and also need appropriate qualifications.

      Credit union exception
      Because of their ‘community based ethos’ the requirements will not apply to the normal activities of Credit Unions. The Financial Regulator has indicated that it will consult with the Credit Unions to develop an appropriate specific regime for them. Credit Unions, where they are also authorised as insurance intermediaries or mortgage intermediaries, will be subject to the full requirements in relation to these particular activities.

      Summary
      These changes represent a significant raising of the bar by the Financial Regulator. For some regulated firms implementing them will be a significant challenge and will necessitate a detailed examination of current business processes. For others, particularly larger institutions, they may pose less of a challenge. In either case these new requirements continue the trend of increasing regulation and also the Financial Regulator’s practice of looking to apply its requirements consistently across all firms regulated by it.


Joe Beashel is a partner in the banking and financial services department at Matheson Ormsby Prentice and is Head of the firm’s regulatory risk management and compliance group. He can be contacted by phone: +353 1 619 9000 or by email: joe.beashel@mop.ie Further information on the firm is available at www.mop.ie