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Advisers must rethink staff roles in line with new EU rules

New EU rules on the supervision of staff come in to force in January 2018, and adviser firms should start preparing now, say Graeme Stewart and David Ryder, partners at regulatory consultancy firm Paradigm.

With Brexit plans now rapidly gaining momentum and thoughts turning to how Britain might survive in a post-EU environment, it is sometimes easy to be swept along on a tide of anti-Brussels legislation euphoria. But European financial legislation is still full steam ahead and, as part of this, one important question you need to be asking yourself is: what are you doing about the new European Securities and Markets Authority (ESMA) requirements which apply from 3 January 2018?

With Brexit plans now rapidly gaining momentum and thoughts turning to how Britain might survive in a post-EU environment, it is sometimes easy to be swept along on a tide of anti-Brussels legislation euphoria. But European financial legislation is still full steam ahead and, as part of this, one important question you need to be asking yourself is: what are you doing about the new European Securities and Markets Authority (ESMA) requirements which apply from 3 January 2018?

The guidelines

For those that are not aware, the new requirements relate to guidelines that will govern the supervision of staff. In short, the main points are:

  • The level, the intensity of knowledge and the competence expected for staff providing investment advice should be of a higher standard than all other staff.
  • Staff involved in giving either advice or information know and understand what is expected from the firm’s internal procedures, as well as the regulatory requirements.
  • Firms should ensure that staff have the necessary levels of knowledge and competence to fulfil their obligations, reflecting the scope and degree of the relevant services provided.

To simplify things, you may wish to focus on which staff do not fall under these guidelines. These include:

  • Employees only pointing out where clients can find information.
  • Employees distributing brochures and leaflets to clients without giving any additional information.
  • Employees who only hand over information (for example a KIID) without giving any additional information.
  • Employees who perform back office functions and do not have direct contact with clients.

For all other staff, there are 10 ESMA competencies which apply to staff giving information about investment products/services or ancillary services and 12 ESMA competencies applicable to staff giving investment advice.

Non-advising staff

The vast majority of financial adviser firms employ staff who will be affected by these requirements.

Only by constructing, or reviewing, job descriptions carefully against each ESMA competency will it become clear if staff are performing a role to which any of these competencies will apply. This may involve changing staff roles and/or job descriptions to deliberately include or exclude certain members of staff as appropriate

Once firms have drawn up a list of non-advising staff who fall under the ESMA guidelines, firms will then need to evidence their competence. To help our clients tackle this, we use a shortened training and competence plan specifically for non-advising staff, setting out KPIs and a programme of CPD material.

Advising staff

All 12 ESMA competencies will apply to staff giving financial advice and firm’s current T&C plans will require changes to make them ESMA ready.

But the new requirements don’t just stop there. Firms should ensure that staff who supervise other members of staff have the required knowledge and skills to act as a competent supervisor.

Paradigm does not believe that a supervisory qualification or lengthy ‘industry experience’ will fully meet the requirements in the spirit they are presented. A formal assessment of a supervisors’ competence is required and should include:

  • Breaking down the job role to examine what supervision duties are likely to be undertaken.
  • Creating an assessment framework to test whether the supervisor is competent for each aspect of their role.
  • Building evidence to support the assessment of competence, such as test results, reviews of paperwork completed, or actual observations.
2018 is going to be a very busy year, with MiFID II, the Senior Managers’ regime and the new GDPR regulations all fast approaching. There is no need to panic, but businesses should certainly be starting to shore up their home defences.
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