Seven deadly sins of T&C – are you guilty?

17 July 2019

In implementing SMCR it’s often the C rather than the SMR that presents the biggest challenge. Banks belatedly came to understand what wealth managers are currently struggling with – the ‘Certification’ side of the new regime. In particular, many firms do not currently have the training and competence infrastructure in place to certify their advisers and investment managers as competent.

An effective approach to T&C – or training and competence – is critical in getting the Senior Management and Certification Regime right. On paper, this can look straightforward but we’ve found several common pitfalls in investment management firms – our ‘Seven deadly sins of T&C’. Keep these in mind between now and December and you’ll have a much better chance of getting over the line with SMCR.

Sin #1: Front-line management avoiding ownership of T&C

A common pitfall we see is over-reliance on compliance or HR, instead of front office management taking responsibility for the competence of staff who advise clients and manage their investments. Why is this a problem? Because most HR and compliance people don’t have an in-depth understanding of the roles in question, or what competence in those roles really looks like.

In some firms, first line desk heads and team managers don’t appear to do much managing. Could this be because they were appointed based on the size of their assets under management, rather than possession of any managerial or supervisory skills? Firms are often reluctant to ask team heads to delegate clients, to free-up time to supervise their team, because they are the biggest earners. Why would team managers spend valuable time managing their staff and driving up quality, when that’s not what their performance is judged against when it comes to the crunch?

Sin #2 Generic HR performance management systems not geared up for T&C

A generic HR assessment process that doesn’t focus on the skills, outcomes and behaviours required by an adviser or Investment Manager is unlikely to deliver the specific MI you need to evidence competence for T&C and Certification purposes. For example, the number of observed client meetings conducted by an individual over the year may not be readily available from the system used to record staff appraisals.

Sin #3 Lack of controls and clarity over ‘competence’

In some firms, there is no evidence that new advisers and IMs are signed off as competent before advising clients. Even where there is a sign-off process, the relevant evidence required to support the decision to sign-off an individual as competent is often thin or non-existent. For example, we’ve seen cases in which the decision appears to be based on the new adviser successfully bringing in business (growth in AUM and clients), rather than on any assessment advice quality or compliance with process. It’s not always even obvious who is responsible for supervising new advisers or investment managers – is it the local team leader or someone central?

In our experience, the picture is even more patchy for supervisory (as opposed to client-facing) roles. It’s fairly rare to see solid evidence of supervisors, for example team heads, being assessed and signed off as competent for that role.

Sin #4 Over-reliance on being deemed competent by the previous employer

There’s no need to treat an experienced adviser or investment manager who has just joined you from another firm like a trainee, but you still need to confirm them as competent. Possession of an SPS (Statement of Professional Standing) means that the individual has submitted evidence of meeting the mandatory CPD requirements to their professional body, but it’s not direct evidence of competence in the role. In any case, your standards and processes may well be different from those that the individual was used to at his or her previous employer. You need evidence that he or she is capable of meeting your firm’s standards. For all you know, the move to your firm might have been driven by persistent compliance failings  or by a desire to escape from a compliance regime that was perceived to be too strict. After all, now is the time get rid of incompetent advisers and investment managers before the regulatory reference scheme comes in! In our experience, evidence of competence tends to be even more tenuous (or absent) for supervisors who move firms.

Sin #5 Lack of MI to support a conclusion of competence

If the only available MI relating to the performance of your advisers and investment manages is a high-level dashboard to Senior Management on performance of the team against some KPIs, this is unlikely to be sufficient to confirm competence of individuals. Assuming this MI exists, the question is whether you are able to identify those individuals who are currently ‘failing’ and therefore require additional support or corrective action. If you are unable to do so then the MI suite needs revising.

Furthermore, is this MI landing with the reporting manager to enable them to identify any additional training requirements? In our view, team managers/supervisors need access to a combination of quantitative and qualitative MI about the individuals they are responsible for:

  • Quantitative: number of observed interviews, suitability file checks, annual client reviews, training attended, complaints received etc
  • Qualitative: outcomes of the assessments and how feedback has been taken on board.

An assessment of competence should focus more on the outcomes than on adherence to process. For example, testing client files for good client outcomes (suitability of service and selected investment strategy, and managing the portfolio in the manner agreed with the client). Similarly, root cause analysis of individual complaints can be more illuminating about competence than the numbers of complaints received per individual.

Sin #6 Balanced scorecards that don’t support the certification of competence

Annual appraisals are often based on a balanced scorecard. Post MiFID II, most firms have a mechanism designed to prevent a person receiving a large bonus (driven by revenue growth) if they are guilty of persistent compliance failings. This is all very well, but does the scorecard contain measures relevant to competence, rather than adherence to process or compliance? For example, the number of annual client reviews completed on time, and an absence of complaints doesn’t tell you much about whether an investment manager is competent in the role. If you’re not careful, you could end up with a situation in which an individual could outperform, according to your balanced scorecard criteria, despite not being competent. This leaves you in a rather difficult position when it comes to the certification decision.

Sin #7 Lack of clarity about how the annual confirmation of competence, and the issuing of the certificate, will operate

If your firm is selected for an FCA suitability review, and a certain individual’s client files cast doubt on their competence, you can be sure that detailed questions will be asked about how that person was certified as competent each year. So it’s important that you can show that your certification process is rigorous and consistent. In our view, this means it’s unwise to leave the certification decisions to individual supervisors or team heads.

Is it clear who will certify, who will be consulted, and how the process will operate in your firm? Ideally, first line supervisors and quality checkers, HR, compliance plus the SMF with prescribed responsibility for certification should all be involved. One approach we’ve seen is to create a panel involving key stakeholders who, between them, have the all pieces of the information jigsaw. For example, HR might hold confidential and sensitive information about individuals that could be relevant, but it might not be appropriate to share this with the other stakeholders. The panel could escalate contentious cases to the SMF responsible for certification for a final decision.

 

Training and competency that’s beyond reproach

The Certification Regime should serve as a reminder to all firms, particularly in the wealth management industry, to be clearer about what they mean by competence. Setting out a clear approach to training and competency will not only help your firm meet the obligations of SM&CR, it will also make sure you have the confidence that you have the right people to do the job.

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