The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Principles-based approaches to training and competence

Patrick Thompson

Eukleia Training Ltd

Q4 2006


For almost 20 years those acting as investment advisers for UK authorised firms have had to pass tests on basic regulatory and technical knowledge.
These exams, such as the Securities & Investment Institute’s Certificate contain questions such as these:
(Answers are at the end of the article.)

1. A customer asks what exercise style LIFFE Euronext UK stock options have. Your reply would be:
A European
B American
C All American except FTSE 100
D American and European

2.Under which ONE of the following is market abuse a statutory offence?
A Banking Act 1987
B Companies Act 1985
C Criminal Justice Act 1993
D Financial Services and Markets Act 2000


Equipped with a pass in the examination, the individual is then able to practice as an investment adviser in areas as diverse as investment banking, wealth management or hedge fund sales. The fact-based and elementary nature of the exams has been a source of exasperation to students and this ‘Gradgrindian’ obsession with facts has given (or should have given) little comfort to firms that their employees have the understanding to do the right thing. They may leave the exam hall knowing that there is a maximum seven year prison sentence for insider dealing, but are they able to identify when they may have been made an insider?

The other frustration has been that the examinations have not been tailored to the needs of a particular sector, and consequently have been a very poor fit to the training needs of employees – a particular problem when dealing with the technical and regulatory issues confronted by hedge fund managers.

Changing requirements

After almost two decades, things are about to change. From the implementation date of MiFID, the FSA has stated that those dealing with wholesale/ professional customers will no longer be required to pass these ‘driving test’ examinations.

This recently announced FSA change was first aired in a 2005 FSA Consultation Paper (CP 05/10) and is part of a broader initiative by the FSA and the UK Government to reduce the regulatory burden, remove red tape and move the industry towards a more principles based approach. The FSA is keen to stress that this is not a “dumbing down” of the regime. The overarching requirements of the Training & Competence commitments (TC1), that require firms to ensure that their employees are competent, remain competent and have their competence assessed, will continue. The goal of the reform is to remove unnecessary prescription and usher in flexibility.

In the same CP, and much more controversially, the FSA also proposed to remove the requirement for investment advisers and investment managers dealing with wholesale customers to be “approved persons”. Hitherto, the idea of being personally approved by the regulator as ”fit and proper” and being individually vulnerable to FSA enforcement action was seen as a keystone of the UK regime. The FSA, however, argues that it is staff dealing with retail customers that pose the primary risk to the FSA’s statutory objective of protecting consumers, and it is therefore only these that will need to be approved. On the wholesale side it is the dual threats of market abuse and financial crime that loom largest, and against these risks the FSA already has an array of civil and criminal powers they can deploy against wrongdoers, whether they are approved or not.

The industry’s response to the training proposals within CP 05/10 has been interesting. Whilst most firms are happy to welcome the idea of a principles-based approach there is simultaneously an anxiety that the disappearance of prescription will leave uncertainty about how to demonstrate .competence. There is also anxiety about how the FSA will supervise firms in a principles-based world. While senior FSA staff are believed when they espouse their commitment to the ideal, there is greater scepticism about whether junior supervisors will have either the judgement or the confidence to step back and to allow firms to determine their own route to compliance.

The industry’s response to the suggested removal of approved person’s status has been much clearer. The industry has lobbied for a continuation of the regime which it argued has supported the efforts of compliance staff and senior management in getting ‘buy in’ to compliance. The FSA has held off making a final decision on this issue, citing a need for greater clarity on how the approved persons regime may be reconciled with the need for European harmonisation and MiFID.

The hedge fund industry’s response

What does this mean for the UK authorised hedge fund manager?

At the simplest level, the training and competence rule changes will do away with the need for compliance staff to force often senior and invariably highly qualified staff to sit what are seen as irrelevant exams. However this benefit needs to be offset by the need for some fresh and principles-based reflection about what constitutes competence, and how the required competencies are attained and assessed.

In other industry sectors, notably investment banking, there is beginning to be an examination of whether there is merit in developing a sectoral response to the challenge. The thinking here is partly defensive, in that in the absence of detailed FSA rules, firms can demonstrate compliance by being in step with industry best practice. Another driver is the time and cost efficiencies that may emerge from collaborating with other firms to commission and produce new training and assessment packages. A further benefit could be that if a new, industry driven training benchmark emerges, then satisfactory completion of this benchmark standard would facilitate easier determination of staff competence and assist in the speedy integration of lateral hires from other firms.

As to the content of any benchmark training programme it would seem from a risk-based perspective to focus on regulatory topics such as market abuse and to rely on, experience, university and post graduate qualifications, particularly CAIA and CFA to satisfy the technical elements of competence.

The changes in the FSA’s training and competence regime offer hedge fund managers an opportunity to replace ill-designed and inappropriate examinations with something more appropriate. It also provides the industry with an ideal opportunity to demonstrate once again its commitment to a genuinely principles-based adherence to regulatory and ethical standards.

Question1: C
Question 2: D

Back to Listing

Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Partners
    7. Opportunities at AIMA
    8. AIMA’s 25th anniversary in 2015
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA DDQs
    2. AIMA Annual Reports
    3. AIMA Governance
    4. AIMA Logo
      1. Policy note
    5. AIMA Members' List
    6. AIMA Review of the Year
    7. Committees and Working Groups
    8. Weekly News
    9. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Private Placement Regime
        1. Canada
        2. Dubai
        3. Finland
        4. Germany
        5. Hong Kong
        6. Japan
        7. Saudi Arabia
        8. Sweden
        9. United Arab Emirates
      6. Systemically Important Financial Institutions ('SIFIs')
      7. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      8. Shadow Banking
      9. Volcker Rule
      10. Other
      11. Systemic Risk Reporting
      12. Dealing Commission
      13. Corporate Governance
      14. Securitisation
    2. Markets Regulation
      1. Bank/Capital Regulation
        1. Capital Requirements Directive
        2. EU Bank Structural Reforms
      2. Capital Markets Union
      3. Derivatives/Clearing
        1. EMIR
        2. MiFID II / MiFIR - Derivatives
        3. MAD / MAR
        4. Dodd-Frank Act Title VII
        5. Hong Kong
        6. IOSCO
        7. Singapore
      4. High Frequency Trading
        1. EU automated trading
          1. ESMA Guidelines
          2. Germany
          3. MiFID II / MiFIR - HFT
        2. US automated trading
          1. SEC Regulation SCI
          2. CFTC Automated Trading
        3. IOSCO
        4. Flash Crash
      5. Insurance Regulation
        1. Solvency II
      6. Market Abuse
        1. MAD / MAR
        2. Indices as Benchmarks
      7. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      8. Resolution of Financial Institutions
        1. Europe
          1. EU Bank Recovery and Resolution Directive
          2. EU Non-Bank Recovery and Resolution
        2. CPSS-IOSCO
        3. Financial Stability Board
        4. UK
        5. USA
      9. Shadow Banking
        1. International Shadow Banking
        2. EU Shadow Banking - SFT reporting & transparency
      10. Short Selling
        1. EU Short Selling Regulation
        2. Hong Kong Short Selling Regulation
        3. US Short Selling Regulation
      11. Trading
        1. Dodd-Frank Act
        2. MiFID Portal
        3. REMIT
        4. Securities Settlement
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FIN 48 and IAS 12
      5. Financial Transaction Tax (FTT)
      6. UK Investment Management Exemption (IME)
      7. UK Offshore Funds Regime
      8. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. Bank/Capital Regulation (including NSFR)
        4. BEPS
        5. CFTC Registration and Exemptions
        6. Corporate Governance
        7. Dealing Commission
        8. Derivatives
        9. FTT
        10. High Frequency Trading
        11. MiFID / MiFIR
        12. Other Hot Asset Management Topics
        13. Other Hot Markets Topics
        14. Other Hot Tax Topics
        15. Position Limits
        16. Trading
        17. UCITS
        18. UK Partnership Tax Review
        19. US State and Local Taxes
        20. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Search research documents
    2. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    3. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    4. AIMA Guides to Sound Practices
    5. AIMA guides for institutional investors
    6. CAIA Association pages
      1. Fundamentals of Alternative Investments
    7. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    8. Certified Investment Fund Director programme
    9. Services to Start-up Managers
    10. Glossary
  8. Events
    1. AIMA Events
      1. AIMA Annual Conference
        1. AIMA 25th Anniversary AGM & Annual Conference
      2. AIMA's Global Policy and Regulatory Forum
        1. 2015 Forum - Review
        2. 2015 Forum - Photos
        3. 2015 Forum - Agenda
        4. 2015 Forum - Sponsors and Supporting Organisations
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contact
    5. Press Materials

Sub Menu

  1. Education
    1. AIMA Journal
    2. Bibliography
    3. CAIA Designation
    4. Research
    5. Roadmap to Hedge Funds
    6. AIMA's Investor Steering Committee Paper
    7. Glossary
  2. Regulatory, Tax, Policy & Government Affairs
    1. AIMA Position Papers
    2. AIMA Responses
      1. Australian Tax Office
      2. Authority for the Financial Markets
      3. Committee of European Banking Supervisors
      4. Committee of European Securities Regulators
      5. Commodity Futures Trading Commission
      6. Dubai Financial Services Authority
      7. European Commission
      8. European Securities and Markets Authority
      9. Swiss Financial Market Supervisory Authority
      10. Financial Services Authority (UK)
      11. Financial Services and the Treasury Bureau
      12. Guernsey Financial Services Commission
      13. HM Revenue & Customs
      14. HM Treasury
      15. Independent Commission on Banking
      16. IOSCO
      17. Monetary Authority of Singapore
      18. Securities and Exchange Board of India
      19. Securities and Exchange Commission (USA)
      20. Securities and Futures Commission
      21. Singapore Exchange
      22. The Takeover Panel
      23. US House of Representatives / Senate
      24. Federal Deposit Insurance Corporation
      25. Financial Stability Oversight Council
      26. Financial Stability Board
      27. US Treasury
      28. Internal Revenue Service
      29. US Federal Reserve
      30. Financial Industry Regulatory Authority (FINRA)
      31. Council of European Union
      32. Hong Kong Exchanges and Clearing
      33. House of Lords
    3. AIMA Summaries
      1. CESR
      2. European Commission
      3. Financial Services Authority (UK)
      4. HM Revenue & Customs
      5. HM Treasury
      6. IOSCO
      7. Securities and Exchanges Commission
      8. FSOC
      9. CFTC
    4. Guidance Notes
    5. Jurisdictional Resource
    6. AIMA Noticeboard
      1. EU Directive on Alternative Investment Fund Managers
      2. FSA Remuneration Code
      3. Short Selling
      4. US Dodd-Frank Wall Street Reform and Consumer Protection Act
      5. UK Stewardship Code
      6. Securities Law Directive
      7. EU Directive on Alternative Investment Fund Managers - Level II
      8. EU Directive on Markets in Financial Instruments (MiFID)
      9. International Financial Centres
      10. Bribery Act
      11. Market Abuse Directive
      12. MF Global
      13. FATCA
      14. FTT
      15. Other Tax Issues
    7. AIMA Regulatory Update
  3. Sound Practices
    1. Due Diligence Questionnaires
    2. Guides to Sound Practices
  4. Start-Up Service Providers
  5. Useful Websites