2 November 2000
Howard Davies
Chairman, Financial Services Authority

Introduction

Thank you for the invitation to speak at your conference today.

It may be helpful if I begin by asking what the community of interest may be between the FSA and the Trade Unions who represent members working in financial services. What aims do we have in common? Surely our aims are very different: ours to protect consumers of financial services: yours to secure the best employment deal for your members.

Put in that way, the objectives certainly do sound very different. But there is an important arena in which they come together. We have a strong interest in ensuring that the professionalism of staff in the industry is strengthened. You have an interest in ensuring that your members have access to the training they need to do their jobs well, and to qualifications which are often the key to successful career development.

Financial regulators have over the last few years become increasingly convinced of the value of professionalism, and of a training and competence régime implemented as part of the regulator’s toolkit for driving up standards. Our analysis of the problems consumers have faced, and of the major episodes in which consumer interests have been damaged, shows that poor staff training has often been at the heart of the difficulty. The pension mis-selling episode, with whose consequences we are still grappling, is a case in point. Salesforces were not trained to understand the implications of the new regulatory environment, or in what it implied for the type of work a salesperson or advisor needed to do with a client to assess suitability and deliver ‘best advice’.

But there have been examples in other areas, also, and professionalism is not just a salesforce issue. We have found many examples of poor record-keeping, and poor back-office procedures which have sometimes cost consumers real money, and caused a lot of anxiety and distress at the same time. Again, the root cause has typically been poor training and sloppy procedures.

It is disappointing that regulatory intervention should have been necessary to secure improvements, and to raise standards in the industry generally. Companies should see a clear incentive to do this for themselves. But the sad fact is that regulators have felt obliged to act, and to incorporate training and competence requirements into their rulebooks.

That may, in the past, have been done in a somewhat rigid and detailed way, which has encouraged technical compliance but may not have won the battle of hearts and minds with senior management. Our new approach, which I shall describe briefly today, aims to secure a high level commitment from firms, but to leave the detail to be worked out by the industry itself, largely through its trade associations. It is not a soft option, far from it, because it requires management to take on its own responsibilities. And we hope it will be effective in spreading a commitment to professionalism in areas which previous rulebooks have not reached.

But, first, a word about what we mean by professionalism in the financial sector.

Financial services may not be the oldest profession but it does have a long history and ideas of what is and is not professional behaviour have developed.

Standard [dictionary] definitions mention competence and skill and encapsulate ideas of:

  • efficiency and effectiveness implying a standard against which performance is being assessed,
  • acting with integrity,
  • achieving to the best of your ability or taking pride in your work
  • commitment to training and development to deliver excellent results.

As Regulator we are interested in all these. They are crucial to the achievement of our statutory objectives. And integrity is the central component of our principles for businesses, and our principles for individuals.

Competence

A key element of professionalism is competence. Competence is important because it underpins performance – the performance of everyone from senior management to junior members of staff.

Ensuring satisfactory levels of competence is a prerequisite for achieving all of the FSA’s statutory objectives – consumer protection, market confidence, public awareness and the reduction of financial crime. Standards of competence, more broadly, are also key to the successful development of the UK’s international position. The availability of suitably trained and competent staff is almost always cited as the most important factor determining business location in this industry. So if we can, together, enhance the industry’s professionalism, we can contribute positively to promoting one of the UK’s key competitive advantages. Training is not an optional on-cost. It is the foundation stone of a successful strategy.

Training and Competence

In developing a new framework of rules on Training and Competence we inherited a wide variety of existing regimes.

Some industry sectors have been used to a detailed, prescriptive approach while for others Training and Competence was less explicit within their supervisory framework, though may have been linked to other supervisory principles such as the fit and proper criteria. We also were acutely aware that the attention paid to Training and Competence varied as a result.

In future, we shall want to recognise the efforts of firms that understood the importance of competence and its direct contribution to improving profitability through better performance. We aim to encourage firms which already have well developed polices and procedures in place by allowing sufficient freedom to continue to build on best practice. There’s no point in our imposing our own set ideas on companies already doing well. Yet at the same time we also need to establish a regime which will ensure a consistent acceptable minimum level of competence. That is the tension we face.

In setting out what we require, the challenge has been to find a coherent framework and a form of words that will work with many different types of organisation, from banks, through insurers to brokers, fund managers and IFAs. Now, for the first time, there will be a single, unified framework, which applies to all firms, in a clear and consistent way.

The message is that both regulation and training entered into willingly will be more effective, robust and likely to raise standards beyond minimum levels.

This also makes good business sense. How firms choose to do this is for them to decide but investing the time and effort to get it right before things go wrong must surely be better than sorting out problems after they happen. As part of that process we want to help firms to see why just settling for the minimum is a poor business decision.

Firms where a 'more than mechanical compliance' culture permeates the business and is evident in the way staff carry out their day-to-day work. You could argue that where a firm does not assess the competence of its staff, or has difficulty thinking through its training strategy, it will also have trouble thinking through other aspects of compliance. Training and Competence is, if you like, a litmus test of a firm’s overall compliance culture.

Consultation

To get down to specifics, we set out our initial proposals in CP34 in November last year. Then, as part of the consultative process, earlier this year, we ran a series of roadshows around the country (Carlisle to Exeter, Edinburgh to Cardiff) which over 2200 people attended. The overall response was encouraging. Comments received were published in the Feedback Statement, CP60, issued in July this year.

The Training and Competence sourcebook has two parts: an overarching set of Commitments, detailed rules and guidance and a schedule of examinations.

Industry Commitments to Training

The Commitments are aspirational, they set the direction, for Training and Competence and apply to all staff in authorised firms.

This represents an industry-wide commitment to training. Firms will need to ensure that employees are competent for their role, that they remain competent, and are appropriately supervised. This should be good news for employees in those sections of the industry where commitment to training was perhaps, particularly when times were hard, a low priority.

Our lead in this area fits in well with the Employment Relations Act, passed last year, which, for the first time, includes training as a topic which employers must discuss with the Union. It also supports the Government's initiatives on lifelong learning.

Employee representatives could have a crucial rôle to play here. While an architecture of consultation has been put in place, and a set of regulatory obligations, how effectively they work will depend on you. And your bottom-up efforts could significantly strengthen our hop-down pressures, if that is what you want. To use marketing jargon, we are creating the ‘push’. The issue is whether you, on behalf of your members, are prepared to orchestrate the ‘pull’. Only if the two come together are we likely to secure our objectives.

Detailed Rules

The detailed rules cover activities where risks arise for the consumer or the market place from staff being inadequately trained or supervised. Starting with the recruitment process, the requirements follow the 'development cycle' through training, attaining competence (including passing examinations) and maintaining competence.

Administration Functions

The scope of the FSA's Training and Competence régime, in term of the people covered, largely mirrors the coverage of the current regulators. But, in line with our drive for a consistent approach across the whole industry, we will be extending the requirements for standards from the investment management sector to administration functions in life and pension back offices. This proposal, which applies to the supervisors or team leaders in back offices, was subject to a cost benefit analysis. Many respondents were strongly in favour of this extension, giving improved customer service standards as the main reason for their support. Other benefits mentioned included:

"it will assist staff commitment and loyalty"

"many errors are due to lack of knowledge amongst processing staff" and

"back office staff should be properly qualified".

Some respondents emphasised benefits such as the likelihood of an improved compliance culture in firms and the better opportunities for staff that training provided.

In the consultation process suggestions were also made that we bring into the fold those involved in execution only business, compliance officers, marketing staff and a number of other groups. We will consider these suggestions but do not intend to widen the scope further at the start, save for any Training and Competence implications which emerge from our work on stakeholder pensions.

We estimate that some [x] people will be covered by the Training and Competence régime as it has been set out so far. Any further extensions need to be carefully justified – though I do not rule out such extensions in due course, particularly if there is demand to do so from the industry and those who work in it.

Examination review

One aspect of our requirements which attracts a good deal of attention, and understandably so, is that of the obtaining of a qualification. Qualifications provide independent and objective verification of a body of skills and understanding. Employees are keen to demonstrate to employers their transferable knowledge and skills, confident that being qualified enhances career prospects.

The position we inherit from previous regulators in relation to approved examinations is unwieldy, inconsistent and confusing for those seeking to demonstrate and recognise the achievement that examinations bring. We have said we do not wish to live with this situation for long and have proposed a comprehensive examination review process.

The examination review process will be competency based, that is it will be founded on occupational standards. It will provide an opportunity to rationalise examinations activity by activity, ensuring that both the content of what is examined and the standard at which the exam is pitched is appropriate. It also provides an opportunity, taking into account the international nature of financial business, to locate examinations within both national and international frameworks.

This process begins in full swing in January starting with the examinations required for investment advice. We expect the process to result in fewer, possibly tougher examinations. The over-use of designatory letters is an issue which we have identified and will seek to address as part of the review to improve the recognition of qualifications by consumers and the industry. Consumers are certainly confused today by the alphabet soup of qualifications, and the lengthy lists of initials which appear after some advisers’ names, which are often a lot of sound and fury, signifying nothing.

Training Advisory Panel

The FSA Training Advisory Panel, established last year to assist us in developing the new Training and Competence framework, will take a lead on the examination review. This month we welcome Digby Jacks, Finance Sector Secretary, MSF, as a full Panel member.

Support on Training and Competence

We recognise that some firms without training departments of their own may welcome some support to help them understand and implement what is required.

This is part of our aim to help the industry help itself. We think it is best that trade bodies and institutes develop practical methods and resources. To this end we have produced a toolkit template to provide a suggested format. We are aware of detailed work underway from both institutes and trade associations and I would urge you to support these developments.

As part of the FSA's Industry Training programme we will offer training workshops on Training and Competence for firms next year once the new framework has been issued in its final form. This will be supplemented by a wider programme of workshops to address broader aspects of compliance. In this way we can help firms to understand what is required of them before we test to see if they meet our requirements. This has the further advantage of providing a way of maintaining a relationship with those categories of firms which we may visit less frequently under our risk-based supervision regime.

Supervision

We are finalising the details of how we shall use the various regulatory tools, including Training and Competence.

It is possible to identify a range of situations which could result in closer attention being given to Training and Competence. For example, when new products are introduced and/or new staff recruited, Training and Competence issues would be particularly important. Also the level and type of complaints received about a firm’s activities could highlight training issues that need to be addressed.

Above all we need to ensure that we maintain a consistent approach to this area and so we will have a Centre of Expertise on Training and Competence issues to both support the industry and work with our supervision teams to apply consistently appropriate supervisory programmes. We intend to make public our approach to the supervision of Training and Competence, to reassure the industry that there are no hidden 'extras'.

Partnership – Involving staff directly

Taken together these initiatives represent an extensive partnership with our stakeholders to develop a constructive and mature relationship to Training and Competence which is based on a common vision and understanding.

We need to make our messages accessible, so that we can engage all concerned. An important step will be to produce a leaflet for employees in partnership with the Unions and hopefully the newly formed Financial Services National Training Organisation (NTO) setting out how our requirements affect employees and the role they can play in ensuring our Training and Competence agenda is effective. Today’s conference is another important contribution to the communication effort.

Conclusion

Our interests are in broad based standards of competence and an appropriate focus on professional integrity. That is, if you like, the crossroads at which regulation and business ethics meet. As I said at the start, integrity is a traditional core element of professionalism. If we can support professional integrity, we will be a good way towards meeting our aims. This approach is rather broader and more inclusive than the usual interpretation of professional or professionalism. We are working towards an industry which embraces the value and benefits of training and maintaining competence as part of the business and compliance norm and sets the desirability of learning within an encompassing ethical framework.

I believe that, if we are successful, we will also make the financial services industry a more satisfying and rewarding place to work, which should be positive for you and your members. We want a successful industry, and we want a collaborative and co-operative approach to the task of giving consumers a better deal.

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