Wholesale exams demonstrate MiFID compliance, says expert

Jun 23 2006 Alex Davidson

Wholesale exams will enable firms to comply with part of the Markets in Financial Instruments Directive, according to Oonagh McDonald, visiting fellow at the International Institute of Banking and Financial Services. The FSA's recent abolition of the exams' mandatory status meant that some firms would not take that route, she told a Securities & Investment Institute conference yesterday. MiFID Article 42 states that member states should require the regulated market to maintain transparency rules, including professional standards imposed on the staff of investment firms and credit institutions, McDonald noted.

"This is fairly straightforward. The standards will be required to be transparent and objective and exams are just that. Some firms may decide to do the wholesale exams anyway, even through it is not an FSA requirement, but the problem is that not all will take this view.

Some prefer in-house exams, which can lead to problems, according to McDonald. She recalled a firm in the retail sector where a training official told her: "We got someone through our own in-house training to sell insurance and he turned out to be illiterate".

"That's an indictment. If business is booming, corners might be cut, eventually to the detriment of the firm. It's not always seen," McDonald said.

Bucking the trend

In abolishing the mandatory exam requirement, the FSA is moving out of step with the international trend, McDonald said. When she was working in Russia in 1996 and 1997, she noticed that the country's dealers and brokers were rushing to take the US' Series Seven exam.

"In the US, they have a much tougher approach than we do. If you fail a re-qualifying exam, you're out, and I think sometimes it would be a good idea here. If you move into a new area of wholesale, you have a new exam.

"The UK market has had mandatory exams, which makes it difficult to explain to the US why it fell back on this," she said.

There are mandatory exams in other EU states, such as Spain, she said. In France, compulsory exams apply to compliance officers in wholesale, although not to traders who have degrees in finance. In Germany, fund managers are not required to take an exam but do the Certified Financial Analysts' exam, she said.

Italy is falling behind in this regard, she said. "Employers of traders must issue a declaration of competence, but I'm not sure I'd put faith in this." In the Netherlands, there are no mandatory exams but the government plans to introduce one for retail, she noted. For the country's banking and securities industry, two bodies produced exams, which were not mandatory but passes were needed to get a job or promotion, McDonald said.

When wholesale exams were mandatory, many in the industry sought to become more professional and gained higher qualifications off their own bat, she said. "The process was slower than I would have liked and it did not happen in every case, but it was there. If you remove the first rung of the ladder, will the impetus disappear? We have to do everything we can to show the FSA it's taken the wrong step," she said.

High-level concerns

Senior managers are very nervous about their own standards and training, and that the lack of external exams will leave them with no way of responding to the FSA's visits, McDonald said. "They are not skilled in tests of competence. What is required is objectivity and consistency."

To claim that wholesale clients understood the type of investments that they wanted to make in the wholesale sector would be incorrect, McDonald said. "The finance directors of local authorities, for example, need to rely on the professionalism of the advisers with whom they are dealing."

The advice given to such clients is important and so is the adviser's competence, she said. "The line between wholesale and retail is not as clear as the FSA might believe."

Firms involved in course provision in the retail sector are very nervous that the mandatory standards might be removed in this space, McDonald said. "This could be really disastrous and take away protection for consumers. Nothing definite has happened as yet but a campaign is needed to avoid going back to the 1990s."

There was a lot of political backing behind the FSA's action on training and competence in the wholesale regime, McDonald said. "The problem is that politicians and governments have little experience of buying financial products themselves. They're mostly from the public sector, and that has been their experience of pension provision."

The Better Regulation Task Force was not a useful body to have in this respect, she said.

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