Article by Masterhead.
Authorised Financial Services Providers (FSPs), Key Individuals (KIs) and Representatives (Reps) must meet certain competence requirements which are set out in the Fit and Proper Requirements. The new Fit and Proper Requirements introduce a formal definition of “competence” which means “having the skills, knowledge and expertise needed for the proper discharge of a person’s responsibilities in the performance of his or her functions.”
The competence requirements prescribed in the new Fit and Proper Requirements have been broadened to ensure that FSPs, KIs and Reps provide a professional financial service. In last week’s issue we dealt with the more familiar requirements of qualifications, experience and regulatory exams. This week we look at the newly introduced class of business and product specific training requirements, as well as what FSPs must do to ensure continuous professional development (CPD).
There are some exemptions for certain FSPs, KIs and Reps and transitional arrangements for FSPs, KIs and Reps who are already authorised when the new Fit and Proper Requirements commence on 1 April 2018. Any FSP or person authorised after this date, and who does not qualify for an exemption, will have to meet the full requirements.
Class of Business Training
What is a class of business?
The product categories that an FSP can be licensed for, have been divided into 9 broad classes, each with its own subclasses. For example, Short-term Insurance Personal Lines is a class of business with subclasses such as ‘Personal Lines: Motor policy, Personal Lines: Accident and health policy’, etc. Investments is another class with shares, retirement annuities and derivatives being some of the subclasses.
What is class of business training?
Class of business training must include training on the general and special characteristics of the range of financial products within the class, the typical fee structures, charges and other general risks relevant to the products in that class, appropriateness of different products or features for different types of clients, how economic factors may impact these products or the effect of applicable legislation such as tax.
Class of business training can only be provided by an accredited provider (as defined) or an education institution. Training providers will be accredited by Skills Education Training Authorities (SETA) and according to Quality Council for Trades and Occupations (QCTO) criteria.
When does the class of business training requirement commence?
The provisions which relate to class of business training commence on 1 August 2018. However, there are a number of transitional arrangements which apply – details have been provided below.
Who does class of business training apply to?
As a rule, class of business training generally applies to all FSPs, KIs and Reps. But, there are some entities that are exempted (see Figure 1).
FSPs and Reps must complete class of business training before rendering a financial service in relation to a product and KIs must, prior to managing or overseeing any financial service, complete class of business training for those classes that they are approved for.
Transitional arrangements for FSPs, KIs and ‘full’ Reps
There is some relief, however, for FSPs, KIs and ‘full’ Reps (i.e. not under supervision), authorised prior to 1 April 2018 as their experience is recognised and they are considered to have completed the class of business training. It goes without saying, that any changes made after 1 April 2018, will require compliance with the new requirements. One of the conditions of these transitional arrangements is that Category I KIs will have to inform the Registrar of the different classes of business they currently manage and oversee across all FSPs where the KI is appointed.
Transitional arrangements for Reps under supervision
A Rep who is working under supervision on 1 April 2018 or who is appointed under supervision between 1 April and 31 July 2018, has 1 year (i.e. until 31 July 2019) to meet the class of business training requirements.
Product Specific Training
What is product specific training?
Product specific training is training about a particular financial product, including any amendments or changes to that particular financial product. In terms of the definition, this training must include an assessment.
A lot of detail is provided about what must be included in product specific training, such as:
the specific characteristics, terms and features of the product,
how the product and any underlying features are structured,
the fee structure, charges and other costs associated with the product and how these will impact on real return or benefits of the product,
details of guarantees and risks,
the impact of tax on benefits or real return,
how abnormal market conditions may impact how the product performs,
any lock-in periods,
identity of the product supplier and providers of any underlying component as well as their good standing and regulatory status, etc.
The Registrar does not prescribe who is able to offer product specific training, but we anticipate that many product suppliers who are the experts on their products, will make this type of training available to FSPs. The regulations put the onus on the FSP to ensure that KIs and Reps have gone through product specific training, but we would strongly advise FSPs, KIs and Reps to ask the product suppliers with whom they do business whether they will be providing such training.
When does the product specific training requirement commence?
The commencement date for the product specific training requirements is 1 May 2018. However, there are again certain exemptions and transitional arrangements which FSPs must be cognisant of.
Who does product specific training apply to?
Product specific training applies to all FSPs, KIs and Reps, except:
Category II, Category IIA or Category III – FSPs and Reps, provided they comply with all other competency requirements.
KIs of all Categories of FSPs not giving advice; and
Those FSPs, KIs and Reps illustrated in Figure 1 (above).
Similar to class of business training, FSPs and Reps must complete product specific training before giving advice and/or providing an intermediary service relevant to the financial product for which they are approved or appointed.
Transitional arrangements for FSPs and ‘full’ Reps
FSPs and Reps (excluding Reps under supervision) who are authorised and appointed before the commencement date of the Board Notice (i.e. 1 April 2018) are deemed to have completed the product specific training only for those particular financial products that they were appointed for at that date and they must have given advice or rendered intermediary services in respect of those particular financial products. However, if there are any changes or amendments to these products, then they must complete product specific training on the amendments or changes. While this gives some relief to those who are already active in the industry, FSPs taking on new entrants as Reps will have to carefully plan for their training needs as this will require provision for additional time and costs.
Transitional arrangements for Reps under supervision
A Rep working under supervision as at 1 April 2018, or a person appointed under supervision during April 2018, has until 31 July 2018 (i.e. three months from 1 May 2018) to comply with the product specific training requirements. Three months is not a long time, and again, we would strongly advise FSPs to contact the product suppliers with whom they do business about such training.
Record Keeping and Reporting Requirements for Class of Business and Product Specific Training
One of the responsibilities of an FSP is to make sure that it can show that it is monitoring and tracking the competence of its KIs and Reps and that they are receiving appropriate and relevant training. FSPs must also demonstrate that the technical knowledge, skill and expertise they obtain is evaluated and reviewed as the market changes to ensure that they remain competent for the activities they perform. FSPs need to ensure that its KIs and Reps are proficient in respect of the product and understand the class of business and product specific training relevant to the products they are authorised for.
FSPs must be able to report to the Registrar if asked to do so, and therefore they must implement a Competence Register by 1 May 2018 where they must keep a record of all qualifications, regulatory exams, class of business and product specific training (provided both internally and obtained externally) and CPD.
FSPs must update the Competence Register with all class of business and product specific training completed by it, its KIs and Reps within 15 days after the training occurred and retain all information and documentation relating to the training for at least 5 years.
Continuous Professional Development
CPD is now a reality and this means that FSPs must maintain and update the knowledge and skills that are appropriate for the activities of its Key Individuals and Reps by complying with minimum CPD requirements.
What will count for CPD?
Various requirements must be met in order to meet CPD standards. For example, the CPD activities must:
be relevant to the function and roles of the key individuals and Reps,
contribute to the skill and professional standards of the FSP,
address needs or gaps in the technical and generic knowledge of the KI,
ensure that KIs and Reps understand the environment in which they are rendering services, and
take into consideration changing conditions relevant to the products for which they are authorised.
A CPD activity, in terms of the definition, must be accredited by a Professional Body who must also allocate an hourly value to the activity (or part thereof), and it must be verifiable.
It is interesting to note that product specific training (mentioned above) does not count for CPD purposes.
Who is affected by CPD?
As a general rule, the CPD requirements apply to all FSPs, KIs and Reps. But, they do not apply to Category I FSPs (including their KIs and Reps) that are authorised only to render financial services in respect of Long-term Insurance subcategory A and/or Friendly Society Benefits.
How many CPD hours are required?
The minimum number of CPD hours per 12-month cycle that FSPs, KIs and Reps need to go through depends on how and for what they are authorised. In summary, where FSPs, KIs and/or Reps are authorised to render or oversee the rendering of financial services in:
more than one class of business (e.g. Investments and Long-Term Insurance) they must complete a minimum of 18 hours of CPD activities (this should be the case for most Masthead members),
more than one subclass of business within a single class of business (e.g. Motor policy and Property policy under ST Insurance: personal lines) – 12 hours of CPD activities,
single subclass of business within one class of business must complete 6 hours of CPD activities.
There is a concession for FSPs, KIs and Reps that are authorised, approved or appointed for less than 12 months in a particular CPD cycle. In their case, they need only complete a pro-rated minimum number of CPD hours. Also, similar pro-rating will apply where a Rep is continuously absent from work if that absence is due to maternity leave; long-term illness or disability; or the representative’s caring responsibilities to care for a family member who has a long-term illness or disability.
Planning and recording CPD
Each CPD cycle will run for 12 months, from 1 June every year to 31 May of the following year and FSPs must, within 30 days after each cycle, update their CPD in their competence register. Our advice is rather to do this as and when the training takes place.
In addition to keeping these records, all FSPs must have policies and procedures that set out how they will maintain, update and develop the knowledge and skills that are appropriate for the activities of their KIs and Reps. It should also include training plans for each CPD cycle that address needs and gaps and should demonstrate that the CPD will continually improve the professional standards and practises of the FSP.