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ESMA publishes translations of its guidelines for the assessment of knowledge and competence 16/07

29th April 2016

Introduction

In March 2016 the European Securities and Market Authority (ESMA) laid out its guidelines specifying the criteria for the assessment of knowledge and competence required under Article 25(1) of MiFID II.

These guidelines establish minimum standards for the assessment of knowledge and competence for staff performing Controlled Functions at a firm. As with all ESMA guidance, whilst this is contingent on the eventual introduction of MiFID II, expect the FCA and other competent national authorities to apply the below as guidance from now on.

This regulatory briefing will be relevant to all CPA Audit clients, especially those looking to add new staff in Significant Influence roles (Compliance Officer, MLRO, etc). When doing so, the below should be used as guidance for the minimum standards the FCA expects you to set during the staff recruitment process.

Compliance and reporting requirements

ESMA states that competent authorities and financial market participants must make every effort to comply with the guidelines by incorporating them into their supervisory practices. 

  • ESMA requests that competent authorities to which these guidelines apply must notify ESMA whether they intend to comply or not – stating their reasons for non-compliance – within two months of the date of publication by ESMA. Failure to respond by this deadline will be seen as non-compliant. A template for notifications is available from the ESMA website.
  • Firms to which these guidelines apply are not required to report to ESMA whether they comply with the guidelines.

General guidelines

  • Those providing investment advice should have a higher standard of knowledge and competence than those that only provide information on investment products and services.
  • Firms must ensure their staff possess the necessary knowledge and competence to meet relevant regulatory and legal requirements and business standards.
  • They should also ensure that all staff understand and apply the firm’s internal policies and procedures implemented to remain compliant with MiFID II. Firms should also ensure staff have enough knowledge and competence to fulfill their obligations.
  • The report to the management body should include an assessment and review of the implementation and effectiveness of compliance within the guidelines for investment services and activities.

Criteria for knowledge and competence for staff giving information about investment products, investment services or ancillary services

ESMA states that firms should ensure that any staff providing information about investment products, investment services or ancillary services available through the firm should possess the necessary knowledge and competence to:  

  • Understand the key characteristics, risk and features of the investment products available through the firm, including general tax implications and costs to incurred by the client during transactions. Particular care should be taken when giving information about more complex products
  • Understand the total amount of costs and charges incurred by the client during the transaction of an investment product, investment services or ancillary services.
  • Understand the characteristics and scope of investment services or ancillary services.
  • Understand how financial markets function, including how they affect the value and pricing of investment products.
  • Understand the impact of economic figures, as well as national, regional and global events on markets and on the value of investment products.
  • Understand the difference between past performance and future performance scenarios as well as the limits of predictive forecasting.
  • Understand issues relating to market abuse and anti-money laundering.
  • Assess data relevant to investment products they provide information on, such as Key Investor Information Documents, prospectuses, financial statements, or financial data.
  • Understand specific market structures for the investment products which they provide information on, as well as their trading venues or the existence of any secondary markets.
  • Understand the valuation principles for the type of investment products in relation to which the information is provided.

Criteria for Knowledge

ESMA states that firms should ensure any staff giving investment advice have enough knowledge and competence to: 

  • Understand the key characteristics, risk and features of the investment products they offered or recommended, including tax implications the client could face within transactions. Particular care should be taken when giving advice about more complex products.
  • Understand the total costs and charges incurred by the client in the context of the type of investment product being offered or recommended, as well as any costs relating to the provision of advice and any other services provided.
  • Fulfill the firms obligations in relation to suitability requirements including the obligations set out in the guidelines relating to certain aspects of the MiFID suitability requirements.
  • Understand that the type of investment product the firm provides may not be suitable for the client, after assessing any relevant information they provide against any changes that may have occurred since the information was gathered.
  • Understand how financial markets function, as well as how they affect the value and pricing of investment products they offer or recommend to clients.
  • Understand the impact of economic figures, as well as national, regional and global events on markets and on the value of investment products they offer or recommend to clients.
  • Understand the difference between past performance and future performance scenarios as well as the limits of predictive forecasting.
  • Understand issues relating to market abuse and anti-money laundering.
  • Assess data relevant to investment products they provide information on, such as Key Investor Information Documents, prospectuses, financial statements, or financial data.
  • Understand specific market structures for the type of investment products they offer or recommend to clients, as well as their trading venues or the existence of any secondary markets.
  • Have a basic knowledge of valuation principles for the type of investment products they offer or recommend to clients.
  • Fundamentally understand how to manage a portfolio, including the ability to understand the implications of diversification in relation to individual investment alternatives.

 

Organisational requirements for assessment, maintenance and updaating of knowledge and competence

ESMA states that firms should make employees responsibilities clear and ensure, where relevant, that there is a distinction in the description of responsibilities between the roles of giving advice and information. Firms should: 

  • Assess any staff providing services to clients through the successful completion of a relevant qualification and having gained appropriate experience by providing those services to clients.
  • Carry out at least an annual internal or external review of staff members’ development and experience needs, assess regulatory developments and take action to comply with these requirements.
    • This review should also ensure staff possess an appropriate qualification and maintain and update their knowledge and competence through the undertaking of continuous professional development or training for that qualification, as well as specific training prior to any new investment products being introduced by the firm.
  • Ensure that they submit any record concerning knowledge and competence of staff providing relevant services to clients to their competent authority on request.
    • These records should include information that enables the competent authority to assess and verify compliance with these guidelines.
  • Ensure that if a member of staff has not acquired the knowledge and competence necessary to provide the relevant services, this staff member is not able to provide those services.
    • However, where this member of staff has not acquired the appropriate qualification or the appropriate experience to provide those services or both, they can only provide those services under supervision. The level and intensity of supervision should reflect the relevant qualification and experience of the staff member being supervised, including: supervision during clients meeting and other forms of communication such as telephone calls and e-mails.
  • Ensure that, in situations as above, the supervising staff member has the necessary knowledge and competence required by these guidelines and the necessary skills and resources perform their duty competently.
  • Ensure that any supervision provided is tailored to the services that are provided by that staff member, and cover the requirements of any guidelines relevant to those services.
  • Ensure that the supervisor takes responsibility for providing the relevant services when the staff member under supervision is providing services to a client, as if they themselves are providing the services to the client, including signing-off the suitability report where advice is being provided.
  • Ensure that the staff member, who has not acquired the necessary knowledge or competence in the provision of the relevant services, cannot provide those relevant services under supervision for a period of more than 4 years – or shorter if required by the competent authority.

Next steps

The above is a summary of ESMA’s translations of its guidelines for the assessment of knowledge and competence. If you would like more information the full document can be found here.

As always, please contact a member of the CPA Compliance team if you have any queries.

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