20 Apr EU Guidelines on Assessing Knowledge and Competence under MiFID II
The European Securities and Markets Authority (ESMA) published its guidelines on the assessment of the knowledge and competence of individuals providing investment advice or information about financial instruments, investment services or ancillary services to clients on behalf of investment firms on March 22, 2016.
Under the revised Markets in Financial Instruments Directive (MiFID II), an investment firm is required to ensure that individuals giving investment advice or providing information about financial instruments, investment services or ancillary services to clients have the necessary knowledge and competence to do so and satisfy the firm’s obligations on suitability, appropriateness and reporting and provision of information to clients.
Where requested by its national regulator, an investment firm may be requested to demonstrate that these requirements have been met. National regulators must publish the criteria that will be used to assess such knowledge and competence. ESMA’s guidelines, which apply to local regulators and investment firms, specify criteria for the assessment of knowledge and competence, establishing the minimum standards that staff providing the relevant services should meet.
The guidelines require that the relevant staff are assessed through the successful completion of an ‘appropriate qualification’, which could take the form of either a formal professional qualification that covers the below requirements, or bespoke tests and training that meet the relevant guidelines. In addition, firms must perform an annual review of staff development and ensure all staff maintain and update their knowledge and competence by undertaking the required training.
What staff need to know
Staff that fall under the above 2 categories will need to employ detailed knowledge of a broad range of topics, including (but not limited to):
- the key characteristics, risks, complexity, and total costs of relevant products or services – including general tax implications for the client;
- how the market functions, market structure, and the impact of economic data;
- how to use relevant data sources and valuation principles;
- market abuse; and
- the relevant regulatory requirements and the firm’s internal procedures designed to ensure compliance with MiFID II.
Added to this, staff must put this knowledge in context so they:
- understand when the firm is acting in the best interests of the client;
- know how to meet ethical standards;
- act in line with a firm’s internal policies and procedures (e.g., conflicts, complaints management, product governance, telephone recording, and client order handling).
It will be important for relevant staff to know whether their firm classifies them as providing investment advice or giving information as the standards they should meet will be slightly different.
What a firm must do
Relevant organisational requirements for assessment, maintenance and updating of knowledge and competence are likely to fall to HR and compliance teams for implementation (e.g. job descriptions and understanding the national regulators assessment of what amounts to an appropriate qualification for those giving advice and those providing information, annual reviews of knowledge and competence, report to the local regulator if required). Tasks will include:
- Assessing and reviewing standards;
- Revising training programmes; and
- Putting place any additional resources if there is a knowledge and competency “shortfall”.
The guidelines will come into effect on January 3, 2017.
The EIMF is continually organizing courses and seminars that cover the above requirements. Please contact your EIMF officer for more information on our open and in-house offerings.
The guidelines are available at: https://www.esma.europa.eu/document/guidelines-assessment-knowledge-andcompetence.