What can companies do to demonstrate – to themselves, regulators and customers – that they only recruit people who have the appropriate skillset and expertise for the roles they are performing? 

We look at the implications of poorly designed and implemented training.

Every regulated company is obliged by law to ensure that its workers comply with the “Competent Employees Rule”, as detailed in the FCA and PRA handbooks.

The conduct of employees can have a decisive impact on a company’s success or failure. This means it is crucial for firms to make sure their staff are fully aware of their duties and responsibilities, and capable of carrying them out. This will enable them to uphold a good, customer-focused culture and comply in regulatory areas such as AML training.

One way to make this happen is to define the qualifications and experience required of employees in certain posts. More importantly, though, achievement of an effective compliance system requires a clear focus on training: at the start of an individual’s employment, via refresher courses in the course of their employment and through training specific to their post.

Obligation to ensure Competent Employees

The duty to ascertain that all employees are competent to perform their duties in a regulated firm is contained in the Senior Management Arrangements, Systems & Controls (SYSC) section of the Handbook. It says:

“A firm must employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them.”

Compliance with this regulation makes companies responsible for taking the following steps for all employees (whether approved persons or not):

  • Verifying their competence
  • Ensuring that they remain competent
  • Keeping records that demonstrate their competence

Competence – and how to achieve it

Generally, employees are deemed competent if they have the skills, knowledge and expertise required to perform their job. According to the Training and Competence (TC) section of the handbook, competence also encompasses ethical conduct.  Strictly speaking, this section is applicable to employees involved in the retail sphere, but the regulator has indicated that all companies would do well to bear it in mind in the context of the SYSC competence obligations.

Although the rules may sound straightforward, designing genuinely effective training systems can be challenging – and they can be similarly difficult to implement. As the FCA points out on its website: “[competence] .. includes achieving a good standard of ethical behaviour. It is not simply a question of having obtained the right appropriate qualification and/or reading the Statements of Principle for Approved Persons (APER) where this is required.”

Training for Approved Persons

People who become APERs not only have additional obligations but must qualify (and remain qualified) as fit and proper for their role. This is checked via assessments, the first done by the firm for which the candidate works and the second by the regulator. The assessments examine the candidate’s:

  • honesty, integrity and reputation;
  • competence and capability; and
  • financial soundness.

Under the second of these headings, candidates are assessed to establish that they have the skills, knowledge and expertise required to perform their duties, and they are also subjected to an ethical assessment. According to the FCA:

  • companies must establish systems for assessing employees’ competence that are based on precise criteria to ensure that everybody engaged in the process understands how and when competence is achieved.
  • they must always carry out regular follow-up assessments to ensure that individuals remain competent, and to determine what further training may be required.
  • they must take account not only of changes in the marketplace, products, regulation and legislation, but also of the skills, expertise, technical knowledge and conduct of their staff, as well as how able they are to apply these in actual situations. .
  • they must provide sufficient training to ensure the continued competence of their staff.
  • they must carry out regular checks to verify that the training is an effective means of achieving the desired aim .

Proper documentation must be kept of all these activities so that it can be made available to the regulators if needed. Such records can also be used to produce management information.

How to train effectively

Training adults is a far from easy task that requires careful design and implementation. According to Speck, writing in ‘Education Research Service Spectrum’ in 1996, a number of crucial components must be in place when training adult learners if the process is to be effective:

  • Adults will commit to learning when the goals and objectives are considered realistic and important to them. Application in the ‘real world’ is important and relevant to the adult learner’s personal and professional needs.
  • Adults want to be the origin of their own learning and will resist learning activities they believe are an attack on their competence. Thus, professional development needs to give participants some control over the what, who, how, why, when, and where of their learning.
  • Adult learners need to see that the professional development learning and their day-to-day activities are related and relevant.
  • Adult learners need direct, concrete experiences in which they apply the learning in real work.
  • Adult learning has ego involved. Professional development must be structured to provide support from peers and to reduce the fear of judgment during learning.
  • Adults need to receive feedback on how they are doing and the results of their efforts. Opportunities must be built into professional development activities that allow the learner to practice the learning and receive structured, helpful feedback.
  • Adults need to participate in small-group activities during the learning to move them beyond understanding to application, analysis, synthesis, and evaluation. Small-group activities provide an opportunity to share, reflect, and generalise their learning experiences.
  • Adult learners come to learning with a wide range of previous experiences, knowledge, self-direction, interests, and competencies. This diversity must be accommodated in the professional development planning.
  • Transfer of learning for adults is not automatic and must be facilitated. Coaching and other kinds of follow-up support are needed to help adult learners transfer learning into daily practice so that it is sustained.

Speck, M. (1996, Spring). Best practice in professional development for sustained educational change. ERS Spectrum, 33-41.

Senior staff and boards require carefully targeted training

It is also crucial to provide proper training for senior executives. Despite their extensive experience, they also require continual professional development, given the constant shifts in regulatory backdrop. The increased level of personal liability to which they are exposed is another factor that makes it as important to focus on their training needs as those of more junior staff.

In this particular group of learners, two of Speck’s principles are particularly applicable:

  • Adult learning has ego involved. Professional development must be structured to provide support from peers and to reduce the fear of judgment during learning.
  • Adult learners come to learning with a wide range of previous experiences, knowledge, self-direction, interests, and competencies. This diversity must be accommodated in the professional development planning.

It may be useful for compliance and training staff to take into account how difficult senior staff may find it to acknowledge that they require assistance and to define the areas they need to be trained in. Compliance staff will need to carefully consider how best to convey their requests to managers at a senior level.

Executive coaching may be one useful means of training very senior leaders: a coach (internal or external) may be best placed to offer confidential and objective guidance. Alternatively, group training alongside peers can work, as long as this is appropriate for the scale of the company and consistent with its culture. However, it is unlikely to prove successful if senior staff are reluctant to engage with the process. Similarly, in order for them to work effectively, such training sessions must be tailored to the group concerned.

A further factor likely to complicate training at the very senior level is the shortness of time available to the recipients. It will probably be more effective if sessions are relatively short and focused on aspects directly relevant to the roles of the participants.

Training SIF applicants

Firms must verify the competence levels of staff who are applying for a Significant Influence Function (SIF) prior to sending the application to the FCA. The regulator requires companies to show that their hiring procedures are sufficiently stringent, and that all SIF applicants have undergone proper scrutiny.  Its expectations in terms of due diligence offer a useful guide to all companies seeking to check and maintain the competence of their staff – both SIFs and non-SIFs. The application the company submits on behalf of the candidate must be accompanied by the following documents, as a minimum:

  • CV
  • Role Specification
  • Organisation Chart
  • Recruitment Process
  • Board and Committee Minutes showing discussion of the planned appointment.
  • Interview notes
  • Skills gap analysis
  • Skills Mapping Document
  • Learning and Development Plan
  • Board Biographies and/or executive team mix

It may be useful for firms to check and document the competence of staff at various different levels using skills gap analysis and skill mapping, since the FCA is familiar with this system and these documents.

Irrespective of their specific role, the regulator expects assessments of all senior staff to demonstrate their competence in the following areas:

  • The market in which the firm operates;
  • Business strategy and model of the firm;
  • Risk management and control;
  • Financial analysis and controls (Solo-regulated firms);
  • Governance, oversight and controls;
  • Regulatory framework and regulatory requirements and expectations.

It is therefore vital, when designing and implementing training systems, to include these aspects in the output.

Poor training can prove costly

One example of the price of failing to provide proper training was the fine of £30 million imposed on Homeserve in February 2014 – prompted in part by failings in this area. In its final notice, the regulator attributed the inadequate regulatory knowledge of executives to shortcomings in training; this prevented them from detecting and remedying problems that exposed clients to the possibility of unfair treatment and helped create a culture that prioritised profit over customers’ interests.

Similarly, when the regulator fined asset manager SEI Investments (Europe) Limited (SEI) £900,000 for client assets failings, it highlighted the company’s failure to channel enough resources into training for its staff – in particular in the area of the Client Money Rules. The result was that staff responsible for handling or overseeing the handling of client money made grave mistakes. One particularly egregious example, from February 2014, was the employee who assumed a £14 million shortfall calculated by the internal reconciliation was too large to be correct and manually altered SEI’s client money requirement from £14 million to £932,000. At the time of the incident, the person concerned had not been given any CASS training.

The FCA is not alone in emphasising the importance of effective employee training and competence assessment: these areas were also central in the guidelines of the new Banking Standards Body when it was setting out its remit and in the new Libor Code of Conduct. The BSB proposed the introduction of accredited training systems that would help companies achieve the standards of behaviour and competence it required. The Libor Code also dedicated a chapter to training.

In February 2014, the European Securities and Markets Authority issued a report entitled ‘MiFID practices for firms selling complex products’. The opinion it expressed in the report was that firms should be subjected to regulatory oversight to monitor whether they are using training to make sure that their employees have the skills, knowledge and expertise required for their role., This encompasses not only practical aspects directly related to their own job: they must also be properly familiar with all relevant regulatory obligations and procedures, as this will enable them to determine customers’ requirements and circumstances. They must also be knowledgeable enough about the financial services sector to have a thorough grasp of the financial instruments being sold, and to identify whether a given product is appropriate for a particular customer.

Concerns about effective training are not restricted to the UK: this is a global issue. Not only are good training systems crucial if companies are to ensure that their employees are fully compliant with regulations: they also bolster risk management and help improve the likelihood that a firm will be commercially successful.