knowledge 12 September 2017 |

New Minimum Competency Requirements

The new minimum competency framework reflects recent EU developments relating to professional knowledge and competence requirements contained in the Mortgage Credit Regulations, the revised Markets in Financial Instruments Directive (“MiFID II”) and the Insurance Distribution Directive (“IDD”).

Background

The Minimum Competency Code 2011 (“MCC 2011”) sets out statutory minimum professional standards for staff of regulated financial service providers  (“Firms”) when they are dealing with consumers in relation to retail financial products.  Since it was adopted, professional knowledge and competence requirements have been increasingly introduced or updated as a result of various EU Directives and Guidelines, including the:

• Mortgage Credit Directive which was transposed into Irish law by the European Union (Consumer Mortgage Credit Agreements) Regulations 2016 (the “Mortgage Credit Regulations”);
• MiFID II, which was transposed into Irish law by the European Union (Markets in Financial Instruments) Regulations 2017; and
• the IDD.

In November 2016 the Central Bank of Ireland (“Central Bank”) published a Review of the Minimum Competency Code 2011, mainly with a view to revising the code to take into account the above-mentioned new/updated requirements together with other issues. The new minimum competency framework reflects the outcome of those consultations. The Central Bank has also published feedback to the consultation in its Review of the Minimum Competency Code 2011 – CP106 Questions and Answers (“Q&A”) (here).

Overview of the Revised Minimum Competency Framework

The revised Minimum Competency Code 2017 (“MCC 2017”) (here) and the new Minimum Competency Regulations 2017 (the “Regulations”) (here) will replace the MCC 2011 from 3 January 2018. Like the existing code, the MCC 2017 comprises three parts together with a number of appendices. However, Part 2 of the MCC 2017 now deals with additional standards for certain functions, while the requirements on Firms, currently set out in Part 2 of the MCC 2011, are contained in the Regulations.

Scope

The MCC 2017 imposes minimum competency standards on controlled persons. Like the MCC 2011 it applies to persons exercising a controlled function providing advice (or information) to consumers on retail financial products or arranging or offering such products to or for consumers.  However, it extends the definition of “retail financial products” to include:

• MiFID financial instruments and structured deposits; and
• mortgage credit agreements.

In addition, the new minimum competency standards apply to persons exercising a controlled function which includes providing advice or information on, or arranging or offering to arrange, MiFID investment products and certain MiFID services to or for retail clients and elective professional clients.

Qualifications and Experience Requirements

The MCC 2017 contains new provisions which reflect the minimum knowledge and competency requirements set out in the Mortgage Credit Regulations and ESMA’s MiFID II-related Guidelines for the assessment of knowledge and competence (“Guidelines”). In the case of persons carrying out a relevant function in respect of MiFID services or activities, the person must have a relevant recognised qualification and at least 6 months related experience by 3 January 2018. Persons carrying out any other relevant function must have a relevant recognised qualification or be a grandfathered person.

Part 2 of the MCC 2017 sets out additional standards for certain functions, which apply to persons exercising a controlled function involving certain, mainly non-consumer, activities. These mostly reflect requirements imposed under the Guidelines, the Mortgage Credit Regulations and the IDD. However, additional standards also apply to those directly involved in the design of retail financial products. Specifically, at least one person with material influence on the final decision regarding product design must meet the standards of the MCC 2017 for that product.

Financial Service Providers

As mentioned above, the 2017 Regulations impose obligations on Firms. One of the main changes in the 2017 Regulations is the introduction of a requirement for Firms to carry out an annual review of the qualifications of any employee subject to the MCC 2017 and the development and experience needs of that employee.  A Firm must also ensure that an employee subject to the MCC is aware of, understands and applies the Firm’s internal policies and procedures designed to ensure compliance with the relevant regulatory requirements.

A Firm must ensure a person performing a relevant function on its behalf has obtained the competence and skills appropriate to the relevant function, through experience or training gained in an employment context.

The Central Bank has developed a Certificate of Experience template (Appendix 5 of the MCC 2017) for written records to be retained in a consistent format to demonstrate that the minimum experience requirement has been met. This Certificate must be completed for new entrants carrying out MiFID services or activities only and signed on behalf of the Firm.

The 2017 Regulations generally impose more extensive record-keeping requirements on Firms.

Credit Unions

Credit unions will continue to be covered by the minimum competency requirements when acting as retail intermediaries. The MCC 2017 and the Regulations will also apply to credit unions and credit union staff when devising or creating, advising on or arranging or offering to arrange, mortgage credit products  or carrying out a specified function in respect of such products.

Although the Central Bank consulted on extending the MCC 2011 to apply to all credit union activities within scope, it has decided not to give effect to such an extension at this time. Instead, it intends to undertake further work to gain a better understanding of the impact of its proposed changes on the credit union sector.

Next Steps

Each Firm must ensure that any non-regulated firm carrying out functions on its behalf, including employees and persons performing outsourced functions, complies with the new MCC framework by 3 January 2018.  Failure to do so could result in the Firm being subject to administrative sanctions.

Each Firm must also review its existing employees to ensure that they comply with the revised MCC requirements as well as its on-boarding arrangements for new employees and certain third parties. It should also update its minimum competency related policies and procedures to ensure that they meet the requirements set out in the new MCC framework.

If you would like assistance in updating your MCC policies and procedures to take account of the above changes, please contact us. McCann FitzGerald provides tailored regulatory compliance solutions to clients in the financial services sectors including the development of appropriate compliance procedures in response to regulatory change.  For further information, see our brochure here.