The more detailed regulations that flutter down like leaves in autumn, the more training is needed to ensure that everyone is trained in ever more detailed activities. But do those trained understand why they are being trained and what for? But don’t worry. So, as long as all your employees have been through the right training courses and you tick the right boxes , you will be OK.
Why did no one see it?
Reading about the Woodford mess, I have been struck by the lack of insight and understanding shown by all the players. They may have been trained in specialist (and often irrelevant) subjects and were therefore focused on detailed regulatory technicalities but they lacked an intelligent overview of the situation. The deterioration was obvious both to most institutional investors and smarter to platforms who pulled – out but not apparently to the FCA, Link or Northern Trust, all of whose staff, I am sure, were fully trained in many detailed compliance matters.
A box tick culture
In many ways the FCA has encouraged this narrow approach by creating proxies for its own failure to identify broad issues that could damage investors, to act early to forestall them and then punish miscreants quickly and decisively. Spending two years writing reports is not an adequate substitute for action. It has tried to do this both by issuing sets of ever more detailed rules of conduct and by deluging investors with disclosure, of which assessment of value is the latest example.
It has therefore transferred its own tick box culture and lack of holistic vision, identified by the Gloster report, to the regulated. The Gloster report said “FCA failed to consider LCF’s business holistically. Instead, FCA staff analysed LCF’s breaches as though they were isolated issues.”
Here are some example of the effect of that in action.
- Oops! The fund exceeded the 10% limit on unquoted investments.
“Don’t worry,” says Link. “We are in close contact with the FCA and it’s all been put right by getting some of the companies listed in the Guernsey Stock Exchange”
Box ticked, problem solved.
- The fund’s liquidity is dangerously low and redemptions are accelerating.
“No problem. The FCA is happy that we have categorized all investments in a series of buckets each according to the time it might take to sell them”
That sounds efficient and technical. Box ticked. Problem solved.
Risk based supervision
“Just ask a firm to complete a ten page questionnaire about itself
Surprise, surprise, they got the answers right! Box ticked. Green channel so no need for a visit.
- Keeping the fund on the recommended list
“Performance has tanked and smart investors are piling for the exits, but he’s been contrarian before. And anyway the fund is in compliance”
No probs. That’s OK then. Everything is in compliance.
Training is anecdotal and narrow.
So much training is mechanical and only undertaken because it has to be done to stay in compliance and tick the regulatory boxes.
In the immortal words of a member of the criminal underworld:
‘if you don’t get caught it’s not a crime’.
Some useful training courses
Some typical courses taken from a well-known investment fund training provider’s website:
Anti-money laundering (AML)
– I am sure the Medellin drug cartel makes extensive use of investment funds
Senior managers’ certification regime (SMCR)
– I am sure all workers in all 23 categories of controlled functions are honest and diligent and haven’t been done for fraud, but do they actually understand anything outside their narrow specialities?
Conduct rules
- Just check out our standard 100 page modular procedures manual for employees at all levels. I’ve written many such manuals, so I should know how to make them look like St Mark’s gospel.
MiFID II
–Have you read and understood the prospectus and agreed that you are a qualifying investor
Yes □ No □
GDPR
– “this site has cookies”
Accept □ Decline □
New CASS regulations
– Does cash really go astray in purchase/redemption transactions?
Assessment of value
–Suggestion for a training course ‘ How to bore readers to death in 4 jargon filled pages’ (anyway the FCA is never going to read or police it)
Role of non-executive director
– You have to have them now, but no one’s sure if the are there for investor protection or just to ensure that all everyone’s in compliance and received technical training in GPDR and other esoteric subjects .
It’s easy to pass multiple choice exams
Here is an example from a conversation with a real, highly trained employee (anonymous)
Employees do some compliance training which the FCA mandates as part of a new regulation and the test is made up of twenty questions. After they finish the test, they are shown the result (fail) and all the right answers (a, c, c, b, a, etc. )- and…. (now just take a screenshot!). When they then immediately take the test again they get the same questions. So all they have to do now is copy the correct answers they’ve just been shown to get a 100% score. It only takes them 5 minutes and they didn’t have to know, read, or retain anything. They’ve passed the test and the firm can tell the FCA that it is in compliance.
No probs. All boxes ticked. All in order.
A quote
Former FT writer and now teacher Lucy Kellaway put exam passing like this:
“It pains me to have to teach such bilge. I despise the limited way of thinking that says you need two advantages and two disadvantages to everything and you must structure every six-mark answer in the same way. It is boring, stupid and bears no relation to the economy.”
How did all this help the unfortunate Woodford investors?
But, in the Woodford case, did anyone spot there was a fundamental management and communication problem in the external AFM/ACD governance structure (see my blog about that and too much focus on solving technical issues, while failing, more seriously, to realise that liquidity was draining away. And did anyone do anything about that? “That’s a different department”. “Way above my pay grade; and anyway “More than my job’s worth to make a fuss”. “And I have had full training in SMCR too”.
We don’t deny that specialist skills are needed to address specialist issues. Sure, let those responsible for money laundering learn how to detect and prevent it. Good luck in the world’s capital of money laundering – the City of London. Make sure that you have an approved set of cop outs on your site for GDPR. Have any of you ever ticked ‘don’t accept’? Write procedures manuals so detailed and in such obscure language that everyone at the FCA will be mightily impressed.
But don’t assume that rigorous adherence to detailed rules will ultimately give investors a fair deal. Do try to ensure that everyone has an overview of what the business is all about and what can go wrong. Most people are so siloed that they don’t get the purpose or reason for what they do every day – and may not care either, so long as they get paid for doing really dull clerical jobs.
Our approach to training
We started training in a market where no investment funds had ever existed but where they were planned to play an important part in the future development of share ownership and markets. So we had to start from scratch and explain how they had developed, how they worked, who did what and why they were a useful part of a capital market. That really made us think how to put all that across. Plain language, no technical jabberwock since there were no regulations and not even a regulator to impose them.. That was originally in Russia during the mass privatization process. Russians are well educated, numerate and smart; and decades of totalitarian rule have taught them how to beat the system while not getting sent to the camps. Our efforts were not entirely successful since most licensed fund managers took the easy route and simply stole the money, while remaining completely compliant – of course.
But we did have one success. We wrote a rather good textbook that later became the foundation of our training all around the world. We’ve learnt a lot in training hundreds of people in more than 20 countries. They don’t want to be serfs like 19h century mill workers. toiling away at mechanical processes whose purpose they don’t understand, They like to see the point in what they are doing and why it matters. That gives them job satisfaction
So that’s how we aim to pass on our knowledge. Have a look at the story and what we offer.
You’ll find it on our training website.
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