Masthead Compliance Officers have observed a worrying trend amongst financial service providers (FSPs) of non-compliance with their Product Specific Training (PST) obligations. We share tips on how they can address PST compliance issues in their businesses.
It’s been half a decade since the Fit and Proper requirements that specify how to comply with PST, as defined in Board Notice 194 of 2017, became a legal requirement. Yet, many FSPs still struggle to adequately comply with this obligation – and their non-compliance can result in serious regulatory action like debarment.
The consequences of non-compliance
The PST requirement mandates that before A can provide advice on a specific product, they need to have a thorough understanding of the product. From an outcomes-based perspective, this requirement aligns with many, if not all, of the Treating Customers Fairly (TCF) Outcomes.
With TCF Outcome 2 because as a distributor of the product, it makes sense that there must be a clear understanding of the financial products so that the FSP’s marketing and services can be designed according to the needs of the customers identified and be targeted accordingly. In terms of TCF Outcome 3, PST is relevant so that the FSP can ensure that Representatives are informed on the product so that clients are provided with clear information and kept appropriately informed before, during and after the point of sale.
TCF Outcome 4 is impacted too, PST is directly related to the Representative’s knowledge of the product which impacts the quality and suitability of advice that can be provided. In terms of TCF Outcome 5, PST is needed to ensure that the product will perform as clients have been led to expect and that the service that is provided in relation to that product, is appropriate and of an acceptable standard. In the same way, TCF Outcome 6 is relevant so that the Representative understands the product rules and requirements in order to assist clients with after-sale requirements, ensuring that clients do not face unreasonable post-sale barriers when they want to change the product or submit a claim, request a withdrawal etc.
Sufficient product knowledge must be a basic starting point for Representatives; without it, it’s impossible for a Representative to determine if the product is suitable for their client. This can lead to customer dissatisfaction, potentially resulting in a decrease in profits as clients seek alternative financial services elsewhere.
Compounding the issue, professional indemnity (PI) coverage typically mandates that Representatives adhere to all Fit and Proper requirements, including PST. As a result, an underwriter may decline the FSP’s claim, which can have devastating consequences for a firm.
Moreover, if a product provider becomes aware of a Representative who is offering financial services on one of their products without having completed the required PST, they can decline any further business transactions with the Representative’s FSP and report the matter to the Financial Sector Conduct Authority (FSCA).
Furthermore, if a dissatisfied customer chooses to report a Representative who has neglected to complete the required PST, the FSCA or FAIS Ombud will most likely rule in favour of the client because the advice that was provided was unauthorised as a result of the Representative not being Fit and Proper.
Common PST issues – and potential solutions
1. Failure to update the Competence Register
Within 15 days of completing PST, it must be recorded in the FSP’s Competence Register. This enables the Key Individual to effectively identify and keep track of the financial products that Representatives on the FSP’s licence are authorised to sell, as well as the product providers the firm has agreements with.
However, some FSPs, especially those with several Representatives on their licences, fail to properly update this Register. This holds risk for the FSP and Key Individual as the latter has no way of accurately keeping track of what products and services the business’ Representatives are allowed to sell, or for which products they need additional PST due to amendments.
Solution: FSPs should examine the reasons behind their failure to maintain an up-to-date Competence Register and consider steps they can take within their business to address these shortcomings. For instance, in larger firms where Representatives are based nationwide, a shared folder can be utilised to maintain the Register. Each Representative can add their PST accreditation and submit a Fit and Proper declaration affirming their up-to-date status. The Key Individual should then review and provide approval for the Register on a regular basis.
Alternatively, an administrative staff member can be assigned to gather the necessary PST accreditations from the Representatives and update the Register, which can then be reviewed and approved by the Key Individual.
2. Contracts with too many providers
Having agreements with different product providers isn’t a negative; in fact, it gives FSPs more product options to better address the financial needs of their clients. However, having contracts with too many providers can become a risk if the FSP is unable to keep up with the required PST.
Many FSPs specialise in products and services offered by one or two providers, and the provider will usually send consultants to ensure the FSP is knowledgeable and compliant with the necessary PST requirements. However, for products marketed infrequently or with providers they lack an established relationship with, it’s easy for Representatives and Key Individuals to miss PST requirements. This can lead to situations where, after recommending a product to a client, the provider refuses to proceed due to inadequate accreditation. As a result, the Representative must either complete the PST or explain to the client their lack of accreditation (and in this scenario, the Representative will most likely lose this client).
Solution: FSPs need to weigh up the benefits of having agreements with several product providers with the risk of non-compliance. It will differ from practice to practice, but it’s crucial to determine the amount of product providers a business can cope with while remaining compliant with PST requirements. Time spent on training should also be factored into the equation. Is the time spent on PST worth it? Or should the firm rather cut down on product provider agreements to free up time for other activities in the business?
3. Failure to keep up with PST amendments
When the PST requirement came into effect on 1 April 2018, fully qualified Representatives who were not under supervision were considered to have completed PST for the products they were selling at that time. Our Compliance Officers have discovered that this has caused some Representatives to mistakenly believe that they have fulfilled their PST requirements. However, it’s important to note that PST is an ongoing process due to product amendments. And since PST became a regulatory requirement five years ago, most financial products and services have undergone some type of amendment or update.
FSPs also seem unsure about how often they should do PST.
Our Compliance Officers have also found that while some Key Individuals inform their Representatives when they need PST due to material product amendments or updates, they fail to follow up on whether the training was done or not.
Solution: It needs to be made clear to all Representatives in the business that PST is an ongoing process – even for those who were exempted from PST in 2018 – and as financial products are materially amended, they’ll need to undergo training.
As to the question of how often PST should take place, this is also determined by product amendments. When product providers materially change their offerings or introduce new products, PST must take place.
Additionally, Key Individuals have the responsibility to follow up with Representatives and cannot simply assume that the PST has been completed after informing them about it. Product providers usually attach PST deadlines to their products, but if there is no date associated with it, the Key Individual should add one and proactively request proof of training from the Representative as part of the follow-up process. And by reviewing the Competence Register on a regular basis, the Key Individual should also be able to determine which Representatives have not completed the required PST.
4. Using another Representative’s code
Our Compliance Officers have identified another concerning problem where Representatives are using product codes of other Representatives within the FSP to sign business, without having completed the required PST.
According to Sections 4, 5 and 7 of the General Code of Conduct (GCOC), FSPs must disclose specific information to a client. This includes, but is not limited to, the full name, address and contact details of the Representative. In essence, the client must know who they are conducting business with.
Yet, in the aforementioned scenario, there are two different Representatives involved – one known to the client and one on the record of advice. Should this client be dissatisfied with the advice they received and knock on the door of the FSCA or Ombud, the FSP won’t have a legal leg to stand on.
Moreover, there have been incidents where after product providers become aware of the misuse of product codes, they block the Representatives involved and request an explanation from the Key Individual on how this practice was allowed. If they suspect that the Key Individual is also involved, they may take the matter to the FSCA.
Solution: By keeping the Competence Register up to date and conducting frequent reviews, the Key Individual should be able to identify if Representatives are sharing codes.
Some FSPs have Representatives that specialise in specific areas or product providers, and these Representatives can collaborate to fulfil a client’s needs. However, it’s essential to disclose to the client upfront that the Representatives will be working together and give details of the financial service each Representative is authorised to provide.
Take action
Meeting PST obligations can pose a challenge for FSPs. However, it remains a crucial requirement as it empowers Representatives to provide sound advice and treat their customers fairly. For FSPs struggling to fulfil PST requirements, it is imperative to thoroughly investigate the underlying issues and take prompt remedial action.