When and why did competence become "competency"?

Solution 1:

The 1831 edition of Noah Webster's dictionary defines competence and competency as synonyms:

Sufficiency, legal capacity, or right, fitness, adequacy.

Google Ngrams shows them being used roughly equally often until 1920, when competence starts winning. So competency is not an obnoxious neologism, although it reached a low point around 1960, and may have been revived slightly since then.

I believe that in modern usage, they are no longer exact synonyms.

Although different people undoubtedly use the words in different ways, I would say that competence and compentency tend to be related the same way that dependence and dependency are.

A dependency is something which is dependent on something else. (Although in terms of territories, puppet may often be closer to its actual meaning.)

A competency is an area where you are competent.

Solution 2:

Both words can be traced back to Shakespeare.

He used competence in Henry IV, Part 2, 1594:

And competency in The Merchant of Venice, 1600:

However, from Etymonline, it looks like these words originally had different meanings than they do now:

competence
1590s, "rivalry;" c.1600 "adequate supply;" 1630s, "sufficiency of means for living at ease," from Fr. compétence, from L. competentia "meeting together, agreement, symmetry," from competens, prp. of competere (see compete). Meaning "sufficiency to deal with what is at hand" is from 1790.

Solution 3:

In general, "competence" is used to describe one's general fitness or ability - "Loughner's Mental Competence Is Doubted", Wall Street Journal headline - whereas "competency" (which, I agree, is an obnoxious neologism) means "fitness or ability to complete a certain task" - "Educational Competency Assessment."

I believe the distinction arose out of human-resources law; if you question someone's (an employee's, a coworker's) competence, you come perilously close to making a value judgment about them as a human being (which can lead to lawsuits); if you say that they "lack competency", they may be trained (or not) but you aren't damning them out of hand.